[JPRT, 111th Congress]
[From the U.S. Government Publishing Office]
CONGRESSIONAL OVERSIGHT PANEL
OCTOBER OVERSIGHT REPORT *
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EXAMINING TREASURY'S USE OF
FINANCIAL CRISIS CONTRACTING AUTHORITY
[GRAPHIC] [TIFF OMITTED]
October 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL OCTOBER OVERSIGHT REPORT
U.S. GOVERNMENT PRINTING OFFICE
61-540 WASHINGTON : 2010
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20402-0001
CONGRESSIONAL OVERSIGHT PANEL
OCTOBER OVERSIGHT REPORT *
__________
EXAMINING TREASURY'S USE OF
FINANCIAL CRISIS CONTRACTING AUTHORITY
[GRAPHIC] [TIFF OMITTED]
October 14, 2010.--Ordered to be printed
* Submitted under Section 125(b)(1) of Title 1 of the Emergency
Economic Stabilization Act of 2008, Pub. L. No. 110-343
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Sen. Ted Kaufman, Chair
Richard H. Neiman
Damon Silvers
J. Mark McWatters
Kenneth Troske
CONTENTS
__________
Page
Executive Summary................................................ 1
Section One:
A. Background................................................ 4
B. Provisions that Govern TARP Contracts and Agreements...... 6
1. EESA.................................................. 6
2. Federal Acquisition Regulation........................ 8
3. Interim Final Rule on TARP Conflicts of Interest...... 8
4. Treasury's Internal Policies.......................... 11
5. Recommendations by Oversight Bodies................... 11
C. How Treasury Decided What Functions to Outsource.......... 13
1. In-house vs. Outsourcing Determinations............... 13
2. Distinctions Between Financial Agency and Contracting
Arrangements........................................... 14
3. Additional Factors Affecting Initial Determinations... 15
4. Unique Backdrop Weighed Heavily on Determinations..... 17
D. Description of Contracts and Agreements................... 17
1. Procurement Contracts................................. 19
2. Financial Agency Agreements........................... 25
E. Evaluation of Treasury's Contracting and Agreement
Procedures and Process..................................... 28
1. Compliance with Legal Obligations..................... 29
2. Compliance with Treasury's Internal Controls.......... 31
3. Evaluation of How Treasury Selects Contractors and
Agents................................................. 32
4. Evaluation of Treasury's Post-Award Management of
Contracts and Agreements............................... 33
F. Evaluation of Small Business Arrangements................. 39
G. Evaluation of Transparency and Accountability............. 43
1. Transparency.......................................... 43
2. Accountability........................................ 46
H. Discussion of Conflicts of Interest....................... 48
1. Treasury Gives Preferential Treatment to a Retained
Entity................................................. 49
2. Retained Entity Serves Its Own Interest and Not the
Public Interest........................................ 52
3. Retained Entity Serves its Clients' Interest and Not
the Public Interest.................................... 53
4. Retained Entity Uses Nonpublic Information to Benefit
Itself or its Clients.................................. 54
5. Does the IFR Alleviate Conflicts of Interest?......... 55
I. Activities of Other Oversight Bodies...................... 56
J. Conclusion and Recommendations............................ 57
Annex I: Fannie Mae and Freddie Mac: A Case Study................ 60
A. Role of Fannie Mae in HAMP................................ 62
B. Role of Freddie Mac in HAMP............................... 62
C. Analysis of Treasury's Selection of Fannie Mae and Freddie
Mac........................................................ 62
D. Discussion of Conflicts of Interest....................... 66
E. Evaluation of Small Business Contracting.................. 70
F. Evaluation of Treasury's Monitoring....................... 71
G. Performance Assessment Made Challenging by Insufficient
Reporting.................................................. 74
H. Evaluation of Transparency................................ 74
I. Conclusion................................................ 76
Annex II: Tables................................................. 78
Section Two: TARP Updates Since Last Report...................... 95
Section Three: Oversight Activities.............................. 121
Section Four: About the Congressional Oversight Panel............ 122
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OCTOBER OVERSIGHT REPORT
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October 14, 2010.--Ordered to be printed
_______
EXECUTIVE SUMMARY *
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* The Panel adopted this report with a 5-0 vote on October 13,
2010.
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The Troubled Asset Relief Program (TARP) is a public
program in design and purpose: created by Congress, paid for by
taxpayers, and intended to stabilize the American economy. Yet
private companies today perform many of the TARP's most
critical functions, operating under 96 different contracts and
agreements worth a total of $436.7 million. These private
businesses do not take an oath of office, nor do they stand for
election. They may have conflicts of interests, are not
directly responsible to the public, and are not subject to the
same disclosure requirements as government actors. As such, it
is critical that Treasury scrupulously oversee its contractors
and agents.
The TARP employs private agents through two means:
procurement contracts, which are utilized across the federal
government and are governed by the Federal Acquisition
Regulations (FAR), and financial agency agreements, which are
used only by Treasury and which allow businesses to perform
inherently governmental functions on behalf of the United
States. Under the law authorizing the TARP, Treasury has
extraordinary discretion in using both instruments. For
example, the law explicitly allowed Treasury to waive any
provision of the FAR, and it arguably allowed Treasury to hire
financial agents for a broader range of duties than previously
permitted. Such broad authority helped Treasury to establish
the TARP in great haste during a moment of crisis, but this
expansive discretion must necessarily be accompanied by strict
oversight.
In general, Treasury has taken significant steps to ensure
that it has used private contractors appropriately, and indeed
some experts have praised Treasury for going above and beyond
the usual standards for government contracting. Treasury
provided for competitive bidding for most of its contracts, and
it has established several layers of controls to monitor
contractor performance and to prevent conflicts of interest.
Further, despite the pressing needs of the financial crisis,
Treasury complied with the FAR, although it could have waived
its provisions.
This praise must be viewed in context, however. The
government contracting process is notoriously nontransparent,
and although Treasury appears to have performed well on a
comparative basis, significant transparency concerns remain.
For example, contractors and agents are immune to requests
under the Freedom of Information Act. Contractors may hire
subcontractors, and those subcontracts are not disclosed to the
public. Important aspects of a contractor's work may be buried
in work orders that are never published in any form. Further,
Treasury publishes no information on the performance of
contractors during the life of the contract. In short, as work
moves farther and farther from Treasury's direct control, it
becomes less and less transparent and thus impedes
accountability.
The contracting process has also created confusion about
the role of small businesses in administering the TARP. In one
case, Treasury awarded a contract to a ``small disadvantaged
business,'' which in turn delegated roughly 80 percent of the
contract to a ``large business.'' Thus, although on the surface
it appears that the contract is being performed by a small
business, in actuality a large business is essentially
responsible for performance. Additionally, the Panel is
concerned by the lack of outreach by Treasury to find qualified
minority-owned businesses to participate in the TARP. Although
several minority-owned businesses have received TARP financial
agency agreements, only one prime TARP contract has been
awarded to a minority-owned business.
The largest TARP financial agency agreements were those
with Fannie Mae and Freddie Mac to provide administration and
compliance services for Treasury's foreclosure mitigation
programs. As described in detail in the case study accompanying
this report, these agreements raise significant concerns. Both
Fannie Mae and Freddie Mac have a history of profound corporate
mismanagement, and both companies would have collapsed in 2008
were it not for government intervention. Further, both
companies have fallen short in aspects of their performance, as
Fannie Mae recently made a significant data error in reporting
on mortgage redefaults and Freddie Mac has had difficulty
meeting its assigned deadlines.
The largest TARP contracts have gone to law firms,
investment management firms, and audit firms. The nature of
these firms' relationship to the financial system inevitably
gives rise to a wide range of potential conflict issues,
including the potential for conflicts of interest with these
firms' other clients, self-interested behavior in the
management of TARP contracts, and the misappropriation of
sensitive market information. Treasury has taken these concerns
seriously and performs regular reviews to prevent or mitigate
any potential conflicts of interest, but the process relies
primarily on contractors and agents to self-disclose their
potential conflicts. As a result, the public has only limited
assurance that all potential conflicts have been disclosed and
addressed. Treasury should develop an independent mechanism for
monitoring conflicts that makes it less reliant on contractors
and agents for information.
Concerns about private contracting are of particular
significance given the scale of the involvement of contractors
and agents in the TARP. Fannie Mae alone currently has 600
employees working to fulfill its TARP commitments. By
comparison, Treasury has only 220 staffers working on all TARP
programs combined. In other words, the vast majority of people
working on the TARP today receive their paychecks from private
companies, not the federal government. Although Treasury
deserves credit for its efforts toward improving the
contracting process, given the extensive involvement of private
actors in a program of critical public significance, further
improvements can and should be made.
SECTION ONE:
A. Background
Treasury's use of its contracting authority in the
execution of its duties under the Troubled Asset Relief Program
(TARP) has not caught the public's imagination to the same
degree as some other TARP-related topics. But Treasury has
expended significant amounts of money on obtaining important
services from nongovernmental entities, and, in doing so, has
raised important questions with respect to the extent to which
such services should be outsourced and the best way to monitor
non-governmental entities' performance of those services. These
questions are not unique to Treasury and the TARP, and indeed
some experts praise Treasury's performance in comparison to
other government actors. While Treasury should be pleased with
the praise it has received for its efforts, further
improvements can and should be made in TARP contracting
practices.
The Emergency Economic Stability Act of 2008 (EESA)
authorizes Treasury to enter into financial agency agreements
and procurement contracts in order to fulfill its duties under
EESA.\1\ Financial agency agreements allow Treasury to retain
private companies to perform ``inherently governmental''
functions, while contracts are used to procure all other
outside services Treasury requires to implement EESA.\2\ This
report examines Treasury's use of financial agency agreements
and contracts to obtain services that Treasury cannot, or has
chosen not to, perform itself. It evaluates the process by
which Treasury decides to obtain services from others, the
procedures Treasury has in place to fulfill its oversight
responsibilities, and whether Treasury has the infrastructure
to oversee its agreements and contracts properly. Additionally,
this report considers in more detail the agreements with Fannie
Mae and Freddie Mac for the Home Affordable Modification
Program (HAMP), in light of the significant dollar amounts of
those agreements and their centrality to that program, which
the Panel has examined in several previous reports.\3\
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\1\ 12 U.S.C. Sec. 5211(c).
\2\ The adoption of EESA introduced an element of legal uncertainty
as to whether financial agency agreements must be used only for
``inherently governmental'' functions or if they can be used for a
broader range of duties as well. For a more complete discussion of this
uncertainty, see Sections B.1.b and E.1.b, infra.
\3\ See Congressional Oversight Panel, March Oversight Report:
Foreclosure Crisis: Working Toward a Solution (Mar. 3, 2009) (online at
cop.senate.gov/documents/cop-030609-report.pdf) (hereinafter ``March
2009 Oversight Report''); Congressional Oversight Panel, October
Oversight Report: An Assessment of Foreclosure Mitigation Efforts After
Six Months (Oct. 9, 2009) (online at cop.senate.gov/documents/cop-
100909-report.pdf) (hereinafter ``October 2009 Oversight Report'');
Congressional Oversight Panel, April Oversight Report: Evaluating
Progress on TARP Foreclosure Mitigation Programs (Apr. 14, 2010)
(online at cop.senate.gov/documents/cop-041410-report.pdf) (hereinafter
``April 2010 Oversight Report'').
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Other TARP oversight bodies are auditing performance under
agreements and contracts entered into by Treasury, and this
report does not duplicate that audit work.\4\ The Special
Inspector General for the Troubled Asset Relief Program
(SIGTARP) is also currently conducting an audit of professional
services contract prices and recently completed a detailed
examination of the Public-Private Investment Program (PPIP).\5\
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\4\ The Government Accountability Office (GAO) will release a two-
year report on TARP in early November, which will include a section on
contracting; for a more detailed discussion of SIGTARP's activities,
see Section I, infra.
\5\ Office of the Special Inspector General for the Troubled Asset
Relief Program, Selecting Fund Managers for the Legacy Securities
Public-Private Investment Program (Oct. 7, 2010) (online at
www.sigtarp.gov/reports/audit/2010/
Selecting%20Fund%20Managers%20for%20the%20Legacy%20Securities%20Public-
Private%20Investment%20Program%2009_07_10.pdf) (hereinafter ``SIGTARP
Report on PPIP''). PPIP arrangements are, strictly speaking, recipient
funding under a TARP program. Agreements and contracts involve the
expenditure of money in return for services, whereas recipient funding
is an investment from which Treasury expects a return.
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In light of the pressing urgency of the financial crisis in
the fall of 2008, EESA allowed the Secretary of the Treasury to
waive any provision of the Federal Acquisition Regulations
(FAR), which normally would govern Treasury's exercise of its
contracting authority, and also arguably expanded Treasury's
authority to designate financial agents.\6\ There is some legal
uncertainty as to whether EESA broadened Treasury's authority
to execute financial agency agreements, discussed in more
detail below.\7\ As of September 30, 2010, Treasury had used
its authority to enter into 15 financial agency agreements and
81 contracts, together worth $436.7 million in terms of
obligated value.
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\6\ 12 U.S.C. Sec. 5211(c); 12 U.S.C. Sec. 5217(a).
\7\ For a more complete discussion of this uncertainty, see
Sections B.1.b and E.1.b, infra.
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These agreements and contracts range from the mundane
purchasing of office chairs, to hiring asset managers to
oversee Treasury's TARP investments, to the wholesale
delegation of the administration of multi-billion dollar
programs to outside entities.\8\ Duties under the agreements
and contracts are performed by 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. Without
the traditional accountability mechanisms available to the
public for government actions, it is critical that Treasury
scrupulously oversee its contractors and agents.
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\8\ See U.S. Department of the Treasury, Listing of Procurement
Contracts and Agreements Under EESA (online at
www.financialstability.gov/impact/contractDetail2.html) (accessed Oct.
12, 2010) (hereinafter ``List of Procurement Contracts and Agreements
Under EESA'').
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This report examines Treasury's use of the two instruments
discussed earlier: financial agency agreements and procurement
contracts (which the report refers to collectively as
``arrangements'').
Financial agency agreements allow private
companies to perform inherently governmental functions.\9\
These agreements, permitted to Treasury since the National Bank
Acts of 1863 and 1864, create an agency relationship between
Treasury and a private company. The company acts on behalf of
Treasury and is a fiduciary of the United States.\10\ For
example, the agreement between Treasury and AllianceBernstein
L.P. to manage TARP investments is a financial agency
agreement.\11\
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\9\ But see discussion of whether such agreements must necessarily
be for ``inherently governmental'' functions at Section E.1.b, infra.
\10\ U.S. Department of the Treasury, Procurement Contracts and
Agreements (Jan. 29, 2010) (online at www.financialstability.gov/
impact/procurement-contracts-agreements.html) (hereinafter ``Treasury
Procurement Contracts and Agreements'').
\11\ See Annex II, contract number TOFA-09-FAA-0005; General
Services Administration, Department of Defense, and the National
Aeronautics and Space Administration, Federal Acquisition Regulation,
at Subpart 7.503 (Mar. 2005) (online at www.acquisition.gov/Far/
current/pdf/FAR.pdf) (hereinafter ``Federal Acquisition Regulation'').
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Procurement contracts are the standard instrument
by which government agencies obtain goods and services from
private companies. They are governed by the FAR. Although
contracts may be used to obtain virtually any type of good or
service, government agencies cannot allow contractors to
perform functions that are ``inherently governmental.'' \12\
For example, the agreement for legal services between Treasury
and Cadwalader Wickersham & Taft, LLP, is a procurement
contract.\13\
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\12\ Id. at Subpart 7.5.
\13\ See Annex II, infra, contract number TOFS-09-D-0011.
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On October 3, 2010, Treasury's authority under the TARP
expired. This does not affect Treasury's ability to enter into
new contracts and agreements, although its needs for such
arrangements have changed.
The Congressional Oversight Panel is specifically required
by EESA to examine ``[t]he use by the Secretary of authority
under this Act, including with respect to the use of
contracting authority and administration of the program.'' \14\
Several previous Panel reports have touched on the issue of
contracting under the TARP, \15\ but none have focused
exclusively on the issue.
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\14\ 12 U.S.C. Sec. 5233(b)(1)(A)(i).
\15\ April 2010 Oversight Report, supra note 3, at 86; October 2009
Oversight Report, supra note 3, at 44; Congressional Oversight Panel,
February Oversight Report: Valuing Treasury's Acquisitions, at 12 (Feb.
6, 2009) (online at cop.senate.gov/documents/cop-020609-report.pdf).
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B. Provisions that Govern TARP Contracts and Agreements
1. EESA
As discussed above, under EESA and pre-existing law, the
Secretary of the Treasury is authorized to use two separate
mechanisms to employ private parties to provide goods and
services necessary to the implementation of the statute. First,
the Secretary may enter into contracts.\16\ Second, the
Secretary may designate financial institutions as ``financial
agents'' to assist Treasury in implementing the statute.\17\
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\16\ 12 U.S.C. Sec. 5211(c)(2).
\17\ 12 U.S.C. Sec. 5211(c)(3).
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a. Contracting Authority
The Secretary's contracting authority under EESA includes
contracts for services as well as contracts for goods.\18\ EESA
does not bar contractors from hiring subcontractors or impose
any conditions on the subcontracting process. EESA authorizes
the Secretary to waive ``specific provisions'' of the FAR, the
regulation that typically governs the acquisition of goods and
services and which is discussed in more detail below. This
waiver authority was included to permit a more ``streamlined
process'' if the Secretary determined that ``urgent and
compelling circumstances make compliance with such provisions
contrary to the public interest.'' \19\ Treasury has not,
however, made use of this authority.\20\ Treasury states that
it determined it could accomplish its objectives in a timely
fashion without the need for a waiver.\21\
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\18\ Contracts for services are permissible only if they are
authorized by 5 U.S.C. Sec. 3109, a provision governing the
``employment of experts and consultants.'' See 12 U.S.C.
Sec. 5211(c)(2). EESA mentions only one potential contractor by name:
the statute requires Treasury to consider the FDIC during the process
of selecting asset managers for residential mortgage loans and
residential mortgage-backed securities. 12 U.S.C. Sec. 5217(c).
\19\ 12 U.S.C. Sec. 5217(a).
\20\ Although Treasury has not waived any of the provisions of the
FAR--and therefore the FAR applies to all of the TARP procurement
contracts--it has used the expedited procedures prescribed in the FAR.
Treasury conversations with Panel staff (Aug. 30, 2010).
\21\ Treasury conversations with Panel staff (Sept. 16, 2010).
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b. Financial Agent Authority
EESA authorized Treasury to employ a second, separate
regime to use private parties to assist with the statute's
implementation: it permitted Treasury to designate ``financial
institutions'' as ``financial agents'' to perform ``all such
reasonable duties related to this Act as financial agents of
the Federal Government as may be required.'' \22\ Historically,
financial agents could be employed to perform only ``inherently
governmental'' functions.\23\ If an agency wanted to hire a
private entity to perform non-governmental functions, it was
required to use a procurement contract. It may be the case,
however, that EESA broadened Treasury's authority to employ
financial agents to an extent that Treasury is no longer
constrained by this limitation. EESA authorizes the Secretary
to take actions he ``deems necessary to carry out the
authorities in this Act, including, without limitation,'' the
designation of financial agents, and it states that those
agents ``shall perform all such reasonable duties related to
this Act . . . as may be required.'' \24\
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\22\ 12 U.S.C. Sec. 5211(c)(3).
\23\ Transactive Corp. v. United States, 91 F.3d 232 (D.C. Cir.
1996).
\24\ 12 U.S.C. Sec. 5211(c)(3) (emphasis added).
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Unlike when it hires a contractor, an executive agency is
not bound by the FAR when it hires a financial agent. As a
result, there are essentially no restrictions on the process
Treasury may use for selecting financial agents. Although
financial agents exist outside the FAR's regulatory regime, the
law is well settled that a financial agent must abide by the
principles of agency law, since the financial agent acts an
agent for the government, the principal. As a result, the
fiduciary duties that would attach in any other principal-agent
relationship attach to financial agents, including the duty of
loyalty and the duty of care.\25\ Treasury describes financial
agents as ``an extension of Treasury to act on behalf of the
Government in order to address the unique and often urgent
needs of TARP and OFS.'' \26\ If a financial agent decides to
engage a subcontractor to assist in the performance of the
agreement, it is ``responsible for the acts or omissions of its
affiliates and contractors as if the acts or omissions were by
the Financial Agent.'' \27\
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\25\ See, e.g., United States v. Citizens & Southern National Bank,
889 F.2d 1067, 1069 (Fed. Cir. 1989) (``[T]he government as principal
and in its sovereign capacity delegates to its financial agents some of
the sovereign functions that the government itself would otherwise
perform. . . . The body of procurement law . . . by contrast, applies
to Treasury only when it is acting as a commercial purchaser of goods
and services.''); Treasury Procurement Contracts and Agreements, supra
note 10 (``Financial agents have the fiduciary obligation to protect
the interests of the United States. Financial Agency Agreements entered
into by Treasury do not constitute procurement contracts under the
purview of Federal Acquisition Regulations.'').
\26\ Congressional Oversight Panel, Joint Written Testimony of Gary
Grippo, deputy assistant secretary for fiscal operations and policy,
and Ronald W. Backes, director of procurement services, U.S. Department
of the Treasury, COP Hearing on Treasury's Use of Private Contractors,
at 2 (Sept. 22, 2010) (online at cop.senate.gov/documents/testimony-
092210-treasury.pdf) (hereinafter ``Prepared Statement of Gary Grippo
and Ronald Backes'').
\27\ See, e.g., U.S. Department of the Treasury, Financial Agency
Agreement Between U.S. Department of the Treasury and The Bank of New
York Mellon, at 8 (Oct. 14, 2008) (Contract No. TOFA-09-FAA-001)
(online at www.financialstability.gov/docs/ContractsAgreements/
Bank%20of%20New%20York%20Mellon.pdf) (hereinafter ``Financial Agency
Agreement Between Treasury and BNY Mellon'').
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2. Federal Acquisition Regulation
Unless specifically exempted by statute or regulation,
executive agencies attempting to use appropriated funds to
acquire goods and services must comply with the FAR. The FAR is
more than 1,900 pages long and contains eight subchapters and
53 parts. It includes four guiding principles:
(1) Satisfying the customer in terms of cost,
quality, and timeliness of the delivered product or
service;
(2) Minimizing administrative operating costs;
(3) Conducting business with integrity, fairness, and
openness; and
(4) Fulfilling public policy objectives.\28\
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\28\ Federal Acquisition Regulation, supra note 11, at Subpart
1.10.
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The FAR governs areas as general as contractor selection,
including requirements that certain contracts must be ``set
aside'' for small businesses, \29\ and as specific as
notification procedures for the delivery of radioactive
material.\30\ It prohibits a contractor from offering a
gratuity--defined as ``an entertainment or gift''--to a
government official in an attempt to secure a contract.\31\ It
also provides a variety of circumstances in which provisions
may be suspended if ``urgent and compelling'' circumstances
exist.\32\ Individual federal agencies may also issue
supplemental guidelines to assist with their implementation of
the FAR, and Treasury states that it uses the ``Department of
the Treasury Acquisition Regulation supplement'' as additional
guidance for its TARP procurement contracts.\33\
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\29\ See Federal Acquisition Regulation, supra note 11, at Subpart
9.5. See also Section F, infra.
\30\ Federal Acquisition Regulation, supra note 11, at Subparts 6,
9, 23.6.
\31\ Federal Acquisition Regulation, supra note 11, at Subparts
3.202, 52.203-3(a).
\32\ See, e.g., Federal Acquisition Regulation, supra note 11, at
Subpart 31.10.
\33\ Treasury Procurement Contracts and Agreements, supra note 10.
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The FAR does not prohibit contractors from hiring
subcontractors to perform the duties specified in the
contract.\34\ While it requires contractors to receive consent
from the contracting executive agency prior to entering certain
types of subcontracts, the FAR itself generally does not apply
to subcontractors.\35\ Although the primary contractor has a
direct relationship to the contracting agency, the
subcontractor does not; it is bound by the contract between it
and the primary contractor.
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\34\ See generally Federal Acquisition Regulation, supra note 11.
\35\ See Federal Acquisition Regulation, supra note 11, at Subpart
44 (stating that a consent is required in certain types of contracts,
and in others the contracting officer ``may require'' consent if he
determines that it ``is required to protect the Government adequately
because of the subcontract type, complexity, or value, or because the
subcontract needs special surveillance.'').
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3. Interim Final Rule on TARP Conflicts of Interest
EESA required the Secretary to issue ``regulations or
guidelines necessary to address and manage or to prohibit
conflicts of interest that may arise in connection with the
administration and execution'' of the statute.\36\ In
accordance with this provision, Treasury issued an Interim
Final Rule (the IFR) on January 21, 2009.\37\ Many interested
parties commented on aspects of the IFR.\38\ Although the rule
technically remains ``interim,'' the public comment period
ended on March 23, 2009, and in practice, the rule has the same
binding force as any other agency regulation.\39\ The rule
applies to any ``retained entity'' that seeks or holds
``contracts or financial agency agreements . . . for services
under the TARP.'' It applies to subcontractors and consultants,
but not to entities hired to provide ``administrative services
identified by the TARP Chief Compliance Officer'' or to
``special government employees.'' \40\ The rule emphasizes that
it does not replace provisions of the FAR and should instead be
read as supplementing them.\41\
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\36\ 12 U.S.C. Sec. 5218(a).
\37\ U.S. Department of the Treasury, TARP Conflicts of Interest,
74 Fed. Reg. 3431-3436 (Jan. 21, 2009) (codified as 31 CFR Sec. 31)
(hereinafter ``TARP Conflicts of Interest''). This Interim Final Rule
followed Treasury's issuance of the Interim Guidelines for Conflicts of
Interest on October 6, 2008, only three days after the passage of EESA.
U.S. Department of the Treasury, Interim Guidelines for Conflicts of
Interest (Oct. 6, 2008) (online at www.treas.gov/press/releases/
hp1180.htm). Treasury has not yet issued a final rule, although it has
indicated that it does plan to issue one. Treasury conversations with
Panel staff (Sept. 23, 2010). At the Panel's hearing on contracting,
Scott Amey of the Program on Government Oversight expressed concern
that a final rule had not yet been issued. Congressional Oversight
Panel, Testimony of Scott Amey, general counsel, Project on Government
Oversight, Transcript: COP Hearing on Treasury's Use of Private
Contractors (Sept. 22, 2010) (publication forthcoming) (online at
cop.senate.gov/hearings/library/hearing-092210-contracting.cfm)
(hereinafter ``Transcript Testimony of Scott Amey'').
\38\ During the 60-day public comment period, several organizations
and individuals filed comments on the Interim Final Rule on TARP
Conflicts of Interest. The bulk of these comments were submitted by
contractors, potential contractors, and organizations that represent
contractors or potential contractors. See Letter from Michael W. Mutek,
chair, Section of Public Contract Law, ABA, & Karl J. Ege, chair,
Section of Business Law, ABA, to the executive secretariat, Office of
Financial Stability, U.S. Department of the Treasury, Interim Rule on
TARP Conflicts of Interest (Mar. 24, 2009) (online at
www.regulations.gov/search/Regs/
home.html#documentDetail?R=090000648092db60) (stating that the Interim
Final Rule is too cumbersome to follow, imposes unrealistic deadlines,
needs more clarification and illustrative examples, and shifts too much
of the work away from Treasury and onto the retained entities); Letter
from Hugh Ching, Post-Science Institute, to the executive secretariat,
Office of Financial Stability, U.S. Department of the Treasury,
Decisions Should Be Based On Expected Rate of Return, Not Just Conflict
of Interest (Mar. 23, 2009) (online at www.regulations.gov/search/Regs/
home.html#documentDetail?R=0900006480929889) (stating that the
government should focus on expected rates of return, not on conflicts
of interest, and that conflicts of interest are only a problem when
they reduce expected rates of return); Letter from
PricewaterhouseCoopers LLP, to the executive secretariat, Office of
Financial Stability, U.S. Department of the Treasury, Interim Rule on
TARP Conflicts of Interest (Mar. 23, 2009) (online at
www.regulations.gov/search/Regs/
home.html#documentDetail?R=090000648092a315) (stating that the Interim
Final Rule needs more clarification because conflict-of-interest
standards must be clear and unambiguous); Letter from Mark R. Manley,
senior vice president and deputy general counsel, AllianceBernstein, to
the executive secretariat, Office of Financial Stability, U.S.
Department of the Treasury, TARP Conflicts of Interest--Comments on
Interim Rule (Mar. 23, 2009) (online at www.regulations.gov/search/
Regs/home.html#documentDetail?R=09000064809290be) (stating that the
Interim Final Rule is too burdensome and costly because it would
require AllianceBernstein to reallocate a disproportionate amount of
compliance resources); Letter from Ben A. Plotkin, executive vice
president, Stifel Nicolaus, to the executive secretariat, Office of
Financial Stability, U.S. Department of the Treasury, TARP Conflicts of
Interest: Interim Rule 31 CFR Part 31 (Feb. 18, 2009) (online at
www.regulations.gov/search/Regs/
home.html#documentDetail?R=0900006480931588) (stating that the Personal
Conflicts of Interest section of the Interim Final Rule should be
narrowed to focus on those retained entities whose financial
obligations might actually give rise to a conflict of interest in
connection with their performances of services).
\39\ As discussed in more detail above, formal regulations are not
the sole constraints on financial agents. As agents of the federal
government, financial agents are bound by two primary fiduciary duties:
a duty of loyalty and duty of care. The duty of loyalty encompasses a
prohibition on self-dealing, which would prevent a financial agent from
entering into many transactions that would raise conflict-of-interest
questions.
\40\ For the purposes of this provision, administrative services
include commercially-available services, such as LexisNexis or other
computer database services. No ``special government employees'' have
been exempted under this provision. All ``special government
employees'' are required to comply with Treasury's ethics processes.
Treasury conversations with Panel staff (Oct. 4, 2010).
\41\ TARP Conflicts of Interest, supra note 37.
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The IFR creates two separate schemes to govern two
different types of conflicts: organizational conflicts of
interest (OCIs) and personal conflicts of interest (PCIs). The
rule defines an OCI as ``a situation in which the retained
entity has an interest or relationship that could cause a
reasonable person with knowledge of the relevant facts to
question the retained entity's objectivity or judgment to
perform under the arrangement, or its ability to represent the
Treasury.'' \42\ OCIs are prohibited unless they are disclosed
to Treasury and either mitigated under a Treasury-approved plan
or waived by Treasury.\43\
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\42\ 31 CFR Sec. 31.201.
\43\ 31 CFR Sec. 31.211(a); 31 CFR Sec. 31.211(e).
---------------------------------------------------------------------------
The rule defines a PCI as a ``personal, business, or
financial interest of an individual, his or her spouse, minor
child, or other family member with whom the individual has a
close personal relationship, that could adversely affect the
individual's ability to perform under the arrangement, his or
her objectivity or judgment in such performance, or his or her
ability to represent the interests of the Treasury.'' \44\ A
retained entity must ``ensure'' that ``all management
officials'' working on the contract or agreement do not have
PCIs unless the conflict has been either ``neutralized'' by
mitigation measures or waived by Treasury. All retained
entities and their employees are prohibited from accepting
certain gifts and ``favors.'' \45\
---------------------------------------------------------------------------
\44\ 31 CFR Sec. 31.201.
\45\ 31 CFR Sec. 31.213(a)(1).
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The IFR includes several additional requirements that apply
to the selection process. Retained entities are barred from
making an offer of ``future employment'' to a Treasury employee
and from giving ``any money, gratuity, or other thing of
value'' to a Treasury employee. The rule also places
limitations on the use of nonpublic information, stating that
retained entities shall not ``solicit or obtain'' from a
Treasury employee any nonpublic information that was ``prepared
for use by Treasury for the purpose of evaluating an offer,
quotation, or response to enter into an arrangement.'' \46\
These prohibitions are aimed at ensuring that the selection
process is open, competitive, and fair.\47\
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\46\ 31 CFR Sec. 31.216(a).
\47\ See Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 4-5 (``Treasury works diligently to identify and prevent
any potential conflicts of interest related to its use of financial
agents and contractors within OFS. In enforcing the TARP conflicts of
interest interim final rule (31 CFR Part 31), Treasury works with its
contractors and financial agents, as well as independently, to identify
and mitigate potential organizational and personal conflicts of
interest that may arise during the retention of financial agents, the
awarding of procurement contracts and blanket purchase agreements, and
during the performance periods of such agreements and contracts.'').
---------------------------------------------------------------------------
Treasury also has established a set of procedures to
implement and enforce the principles articulated in the IFR.
During the inception phase, before Treasury enters an
arrangement, it considers the proposed work plan and the nature
of the entity selected to do the work in order to devise a list
of potential conflicts. Treasury includes provisions on
conflicts of interest in the text of the arrangements after
discussions with the entity, so that the provisions are
individually tailored to each entity. These provisions include
requirements that the entity self-disclose relevant
information, requirements that are customized to match
monitoring needs based on the entity's type of business. To
ensure that such provisions were included in arrangements
entered into prior to the promulgation of the IFR, those early
contracts were renegotiated so as to incorporate the IFR.
Treasury also reviews the mitigation plans developed by the
entities to ensure that they are sufficient.\48\ Treasury, and
not the retained entity, is responsible for determining the
sufficiency of the mitigation measures.\49\ Treasury then
engages in ongoing discussions with the entities to monitor
their compliance, and it receives quarterly reports from them.
If the business structure changes, for example, Treasury may
revisit and revise the original mitigation plan. Finally,
contractors and agents submit inquiries on conflicts issues,
which Treasury tracks in a database. Treasury estimates that it
receives an average of approximately 40 inquiries per
month.\50\
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\48\ Treasury conversations with Panel staff (Sept. 23, 2010). See
also Prepared Statement of Gary Grippo and Ronald Backes, supra note
26, at 2.
\49\ Congressional Oversight Panel, Testimony of Gary Grippo,
deputy assistant secretary for fiscal operations and policy, U.S.
Department of the Treasury, Transcript: COP Hearing on Treasury's Use
of Private Contractors (Sept. 22, 2010) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-092210-
contracting.cfm) (hereinafter ``Testimony of Gary Grippo'') (``[E]ven
though we ask all our agents and contractors to identify conflicts and
come up with plans, ultimately we are the ones who are determining
whether the conflicts have been mitigated.'').
\50\ Treasury conversations with Panel staff (Sept. 23, 2010). See
also Prepared Statement of Gary Grippo and Ronald Backes, supra note
26, at 2.
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4. Treasury's Internal Policies
Treasury developed a set of internal rules to provide
additional guidance regarding its relationships with financial
agents and contractors. While most procurement policies and
procedures are described in detail in the FAR and in Department
of the Treasury Acquisition Regulation (DTAR) supplements, \51\
OFS supplements these policies and procedures with implementing
guidance related to six areas: submitting purchase requests,
Contracting Officer Technical Representative (COTR) nomination
and file organization, contact and inquiries, web publications,
contract and agreement distribution, and acquisition planning.
The ``Policies and Procedures'' for Financial Agents cover
seven separate areas: compensation procedure, guidance and
direction procedure, oversight policy, selection and
designation procedure, access control procedure, vendor
approval, and performance measurement.\52\ For the most part,
these documents contain general information on aspects of
financial agent selection, performance, and monitoring, but
they do not add substantial specific detail to the information
included in the financial agency agreements themselves. The
``oversight policy'' document, for example, states simply that
Treasury is required to work to ``ensure that service levels
are being met.'' \53\
---------------------------------------------------------------------------
\51\ See Section B.2, supra.
\52\ Documents provided to Panel staff by Treasury staff (Aug. 27,
2010).
\53\ U.S. Department of the Treasury, Financial Agent Oversight
Policy, at 4 (Apr. 30, 2010) (hereinafter ``Treasury Financial Agent
Oversight Policy'').
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5. Recommendations by Oversight Bodies
SIGTARP and the Government Accountability Office (GAO) have
also played a meaningful role in guiding Treasury's
implementation of its contracting authority.
a. SIGTARP
During the early months of the TARP, SIGTARP made two
recommendations related to the Secretary's contracting
authority:
(1) That all TARP contracts be posted on the Treasury
website; and
(2) That transparency and oversight-related language be
inserted in recent TARP contracts.
Treasury took steps to address these recommendations, as
described in SIGTARP's initial report to Congress on February
6, 2009. According to SIGTARP, Treasury adopted the first
recommendation ``in full.'' With respect to the second
recommendation, Treasury did not adopt such language in its
initial contracts, but it did adopt it in some subsequent
agreements with large financial institutions.\54\ SIGTARP
asserted that these subsequent agreements were ``far superior
than earlier contracts from an oversight perspective.'' \55\
---------------------------------------------------------------------------
\54\ Office of the Special Inspector General for the Troubled Asset
Relief Program, Initial Report to the Congress, at 5 (Feb. 6, 2009)
(online at www.sigtarp.gov/reports/congress/2009/
SIGTARP_Initial_Report_to_the_Congress.pdf) (hereinafter ``SIGTARP
Initial Report to the Congress'').
\55\ Id. at 5.
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b. GAO
In several of its reports, GAO provided Treasury with
recommendations for improving its contracting procedures. For
example, in its March 19, 2009 report on the ``Status of
Efforts to Address Transparency and Accountability Issues,''
GAO recommended that Treasury ``expedite efforts to ensure that
sufficient personnel are assigned and properly trained to
oversee the performance of all contractors, especially for
contracts priced on a time-and-materials basis.'' \56\
Similarly, in its June 2009 report, GAO recommended that
Treasury should ``explore options for providing to the public
more detailed information on the costs of TARP contracts and
agreements, such as a dollar breakdown of obligations and/or
expenses.'' \57\ Several additional recommendations are
included in other GAO reports. For example, GAO recommended
that ``[f]or contracting oversight . . . Treasury review and
renegotiate existing conflict-of-interest mitigation plans, as
necessary, to enhance specificity and conformity with the new
interim conflicts of interest regulation and that it take
continued steps to manage and monitor conflicts of interest and
enforce mitigation plans.'' \58\
---------------------------------------------------------------------------
\56\ See U.S. Government Accountability Office, Troubled Asset
Relief Program: Status of Efforts to Address Transparency and
Accountability Issues, at 3, 12 (Mar. 19, 2009) (GAO-09-484T) (online
at www.gao.gov/new.items/d09484t.pdf) (hereinafter ``March 2009 GAO
Report on Transparency and Accountability''). This recommendation was
included in other GAO reports as well. See, e.g., U.S. Government
Accountability Office, Troubled Asset Relief Program: Status of Efforts
to Address Transparency and Accountability Issues, at 3 (Feb. 24, 2009)
(GAO-09-417T) (online at www.gao.gov/new.items/d09417t.pdf)
(hereinafter ``February 2009 GAO Report on Transparency and
Accountability'').
\57\ U.S. Government Accountability Office, Troubled Asset Relief
Program: June 2009 Status of Efforts to Address Transparency and
Accountability Issues, at 84 (June 2009) (GAO-09-658) (online at
www.gao.gov/new.items/d09658.pdf) (hereinafter ``June 2009 GAO Report
on Transparency and Accountability'').
\58\ See, e.g., March 2009 GAO Report on Transparency and
Accountability, supra note 56, at 13.
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According to both Treasury and GAO, Treasury took
meaningful steps to address several of these recommendations.
In its February 24, 2009 and March 19, 2009 reports, for
instance, GAO noted that ``consistent with our recommendation
about contracting oversight, Treasury has enhanced such
oversight by tracking costs, schedules, and performance and
addressing the training requirements of personnel who oversee
the contracts.'' \59\ Treasury also tracks some of these
recommendations, noting the status of its progress and
providing extensive detail on the steps it has taken to address
the recommendations.\60\
---------------------------------------------------------------------------
\59\ February 2009 GAO Report on Transparency and Accountability,
supra note 56, at 5; March 2009 GAO Report on Transparency and
Accountability, supra note 56, at 4.
\60\ Data provided by Treasury staff to Panel staff (Sept. 2,
2010). The list provided to Panel staff included only seven
recommendations in total, derived from only two GAO reports: December
2008 and January 2009. Several of these recommendations were reiterated
in later reports, such as the March 19, 2009 report. According to the
data provided by Treasury staff, the status of all of these
recommendations is ``closed.'' However, while Treasury and GAO agree
that Treasury has addressed several of the recommendations, it is not
clear that the list provided to Panel staff is fully complete, as it
omits the recommendation that Treasury provide more detailed
information on TARP contracts and agreements. The Panel has received no
information about whether Treasury is tracking progress on this
recommendation.
---------------------------------------------------------------------------
C. How Treasury Decided What Functions to Outsource
1. In-house vs. Outsourcing Determinations
The acquisition decisions of the Office of Financial
Stability (OFS), the office that oversees the TARP, are
overseen by the OFS's Contract and Agreement Review Board
(CARB), which is composed of program and procurement
executives. CARB centralizes decisions regarding the office's
contracting and financial agency requirements, serving as the
deliberative body for determining whether to perform a function
in-house or to outsource it.\61\ This formalized process was
established in March 2009, after the urgency of the initial
stages of the financial crisis had subsided.
---------------------------------------------------------------------------
\61\ Once a decision to outsource is made, separate processes
govern the procurements or financial agency agreements, which are
discussed in more detail later in the report. In terms of deliverables,
the process for these determinations are as follows (Treasury
conversations with Panel staff (Sept. 16, 2010)):
a. Procurement contracts: For most contracts, the program officer
who would like a contractor to perform a particular service will send a
document outlining the scope of work to be performed to the relevant
COTR, the specially certified officials who manage the contracts day to
day. The COTR will then translate that scope of work into specific
deliverables that will be included in the contract or task order. For
complex or large contracts, Treasury has a more formal system that
requires program officers to submit a work request.
b. Financial agency agreements: An informal process exists for
determining specific deliverables for all financial agents other than
Fannie Mae and Freddie Mac. For Fannie and Freddie, the process is more
elaborate (and discussed in greater detail in Annex I, infra). Treasury
maintains a deliverables list for both Fannie and Freddie. These lists
are constantly updated to reflect Treasury's needs and are reviewed
weekly by two committees.
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In testimony before the Panel, Treasury outlined the key
factors that govern the decision-making process regarding the
potential acquisition of contracting and financial agent
services.\62\ In addition to other issues, including the
availability of resources in other parts of the federal
government (which are explored in more detail below), Treasury
cited three main factors that it considers in determining
whether outside assistance is needed, either in the form of a
contractor or a financial agent:
---------------------------------------------------------------------------
\62\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 2-3.
---------------------------------------------------------------------------
Infrastructure: The ability of the government to
build efficiently or leverage in-house resources may be overly
expensive or unnecessary to scale for the particular task at
hand. For example, Treasury does not have a trading desk to
execute capital markets transactions or the extensive capital
markets transaction experience or in-house expertise in certain
industries (for example, the automotive industry) that would
match that of a large law firm. Further, the utility of
establishing long-term infrastructure for a program that by
definition was billed as temporary was also a factor.
Objective Third Party: Treasury may require an
independent third party opinion to assess the valuation of an
asset or the wisdom of a proposed transaction. This may be
particularly important to assess the financial and strategic
assumptions underpinning contemplated transactions with
taxpayer money (for example, similar to a fairness opinion
provided by an independent financial advisor to the board of a
company assessing a proposed transaction).
Expediency or Timing Considerations: Particularly
in the context of the crisis backdrop in the wake of the TARP's
passage, efforts to build internal capabilities organically may
have been prohibitively slow given the length of time needed to
reach critical mass, as well as Treasury's expectation that
TARP programs would be wound down as quickly as possible.
In discussions with Panel staff, Treasury addressed
additional factors that often limit its ability to assume more
work in-house, necessitating the use of contractual and
financial agent resources.\63\ (See Annex I for an example of
the factors informing Treasury's decision to hire Fannie Mae
and Freddie Mac.) These include the availability of in-house or
other government agency expertise. While other agencies, such
as the Federal Reserve Board (FRB) and the Federal Deposit
Insurance Corporation (FDIC), may have staff with the
appropriate expertise, Treasury explained that there are
practical limitations associated with pursuing this route,
given that other agencies are hesitant to ``loan'' key staff,
particularly when that expertise is required in-house. A
related factor is the difficulty in identifying and hiring the
appropriate full-time staff (and the ability to terminate/
reassign in-house employees after completion of the task),
compared to the relative ease of seeking temporary outside
help. In many instances, Treasury is more likely to outsource a
potential task if there is limited long-term utility from the
project (for example, its expected duration is less than six
months).\64\ In any case, Treasury did of course make selective
hires of specialists to manage specific areas of the
department's TARP mandate (restructuring specialists, for
example), including financial agent and contracting service
providers.
---------------------------------------------------------------------------
\63\ Treasury conversations with Panel staff (Sept. 16, 2010 and
Oct. 4, 2010).
\64\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
2. Distinctions Between Financial Agency and Contracting Arrangements
Decisions to task financial agents differ from contracting
services, reflecting the recognition that contracting involves
the ``acquisition of goods and services from the marketplace,''
whereas financial agents ``serve as an extension of Treasury to
act on behalf of the Government in order to address the unique
and often urgent needs of TARP and OFS.'' \65\
---------------------------------------------------------------------------
\65\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 2-3. See Section E.3, infra, for discussion of contracting
vs. financial agency agreements.
---------------------------------------------------------------------------
When determining whether to contract services, the
following questions, outlined in Treasury testimony, are most
important:
(1) Are the required goods and/or services other than
something that is inherently governmental?
(2) Can the services be obtained at a competitive price
from the private sector?
(3) Can the services be acquired without creating an
immitigable conflict of interest?
(4) Will it be more cost-effective, for duration or other
reasons, to outsource the work? \66\
---------------------------------------------------------------------------
\66\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 2.
---------------------------------------------------------------------------
The decision to employ a financial agent focuses on the
following two factors:
(1) Does the work entail the direct management of public
assets, such as the purchase, valuation, custody, or
disposition of investments or cash? (Financial agent authority
is used to obtain the infrastructure, inherent capabilities, or
special expertise of a financial institution.)
(2) Does the work entail close collaboration between
Treasury and a provider such that a fiduciary relationship is
required? Simply put, does OFS require the services of an agent
who can act as an extension of Treasury? \67\
---------------------------------------------------------------------------
\67\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 2-3.
---------------------------------------------------------------------------
3. Additional Factors Affecting Initial Determinations
Treasury maintains that it will not engage a financial
agent or contractor if it is unable to mitigate an identified
conflict. In terms of potential conflicts of interest that
would disqualify certain tasks from being outsourced to a
particular entity,\68\ Treasury stated that hiring a TARP
recipient to manage TARP assets or a law firm that represented
a client on the other side of a transaction with Treasury are
examples of conflicts that cannot be mitigated.\69\ In the
cases of The Bank of New York Mellon Corporation (BNY Mellon)
and Morgan Stanley, two TARP recipients, Treasury noted that
BNY Mellon was not making investment decisions in its role as
master custodian of the TARP,\70\ and that Morgan Stanley had
paid back its TARP funds prior to receiving the job of managing
TARP assets.\71\ It could be argued, however, that by taking
government money in the first place, even if acceptance of the
money was mandatory and it was subsequently repaid, certain
TARP recipients had a special status that should have
disqualified them from acting as a financial advisor in
relation to TARP funds.
---------------------------------------------------------------------------
\68\ As discussed in more detail in Section H, infra, EESA does not
require Treasury to bar all conflicts of interest outright. Rather, the
statute permits Treasury to develop procedures to ``address and manage
or to prohibit'' conflicts (see 12 U.S.C. Sec. 5218(a)).
\69\ Testimony of Gary Grippo, supra note 49; Treasury
conversations with Panel staff (Sept. 23, 2010 and Oct. 4, 2010).
\70\ Treasury contracted BNY Mellon's securities services unit to
``provide the accounting of record for the portfolio, hold all cash and
assets in the portfolio, provide for pricing and asset valuation
services and assist with other related services. The Bank of New York
Mellon will serve as auction manager and conduct reverse auctions for
the troubled assets.'' See Bank of New York Mellon, The Bank of New
York Mellon Chosen to Assist the U.S. Department of the Treasury (Oct.
14, 2008) (online at bnymellon.mediaroom.com/index.php?s=43&item=316).
To date, BNY Mellon's actual duties performed under TARP have been
limited to custodial services.
\71\ While Morgan Stanley was not engaged as a financial advisor to
Treasury in connection with its sale of Citigroup shares until March
29, 2010--after its $10 billion repayment of TARP funds on June 9, 2009
and the subsequent repurchase of its TARP warrant for $950 million on
August 6, 2009--the firm was previously retained as a financial advisor
to Treasury in connection with its restructuring of Fannie Mae and
Freddie Mac on August 5, 2008. See U.S. Department of the Treasury,
Treasury Announces Plan to Sell Citigroup Common Stock (Mar. 29, 2010)
(online at www.treas.gov/press/releases/tg615.htm); Morgan Stanley,
Morgan Stanley Statement on Paying Back TARP Funds (June 9, 2009)
(online at www.morganstanley.com/about/press/
articles/580e1eb2-54f3-11de-96f6-3f25a44c9933.html); Morgan Stanley,
Morgan Stanley Agrees to Repurchase Warrant from the U.S. Government
(Aug. 6, 2009) (online at www.morganstanley.com/about/press/articles/
42d008d5-8209-11de-b5d1-6d6288639586.html); Morgan Stanley, Morgan
Stanley to Advise U.S. Department of the Treasury Regarding Fannie Mae
and Freddie Mac (Aug. 5, 2008) (online at www.morganstanley.com/about/
press/articles/6742.html). Separately, the firm was also engaged by the
Federal Reserve Bank of New York on October 16, 2008 in connection with
the restructuring of AIG. See Federal Reserve Bank of New York,
Agreement Between Morgan Stanley and the Federal Reserve Bank of New
York Regarding American International Group, Inc. (Oct. 16, 2008)
(online at www.nyfrb.org/aboutthefed/Morgan_Stanely_AIG.PDF).
---------------------------------------------------------------------------
Conflict identification and mitigation efforts not only
inform the competitive bidding process, \72\ they are also
addressed earlier in the process, shortly after an external
need is identified, but before solicitations are released for
proposals. OFS assesses the nature of potential conflicts,
taking into account the business structure of likely offerors.
Based on this analysis, OFS compiles contract language that is
targeted to identifying likely conflicts at the outset of the
process.\73\ For both contracts and financial agency
agreements, Treasury solicits information related to ``actual,
potential, or apparent organizational and personal conflicts of
interest.'' \74\ These inputs form the basis for conflict
mitigation plans that are reviewed and approved by Treasury.
---------------------------------------------------------------------------
\72\ Conflicts are discussed in greater detail in Sections G and H,
infra.
\73\ Treasury conversations with Panel staff (Sept. 23, 2010).
\74\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 5.
---------------------------------------------------------------------------
Treasury officials maintain that they have not identified
any instances where wholesale potential conflicts within a
certain segment of the industry prevented Treasury from
following through on seeking outside assistance. And while OFS
has disqualified individual contractors based on perceived
conflicts in the bidding process, Treasury informed the Panel
that there have been no instances of financial agents that had
otherwise been selected who have been rejected based on
conflicts that have been uncovered during the process.\75\
---------------------------------------------------------------------------
\75\ Treasury conversations with Panel staff (Sept. 23, 2010).
---------------------------------------------------------------------------
Treasury also claims that eligibility for financial agent
roles is limited to institutions ``without material or
debilitating regulatory findings'' or ``any findings that would
represent a risk to Treasury.'' \76\ Treasury noted that there
are procedures in place, supplemented by an internal
information database, that allow ``appropriate information-
sharing mechanisms'' with other regulators to assess if there
is a potential reputational problem for Treasury.\77\
---------------------------------------------------------------------------
\76\ Testimony of Gary Grippo, supra note 49.
\77\ Testimony of Gary Grippo, supra note 49. The quotations
specifically reference determinations for financial agents, although
procedures for contractors are similar. Treasury conversations with
Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
In the contracting realm, issues related to reputational
risk may be handled differently; reputational risk may be
defined somewhat narrowly to focus on problematic business
units or broad-based financial wrongdoing. For example,
although Fannie Mae and Freddie Mac were awarded financial
agency agreements after they went into government receivership,
the agreements were for functions that did not rely on credit
risk assessments. (It is difficult to envision a scenario
wherein these contracts had any material bearing on either
firm's financial health, given the relative small size of the
contracted amount, in the context of the more than $90 billion
in losses reported between the two firms in 2009.) \78\
---------------------------------------------------------------------------
\78\ The revenue from the TARP contracts for Fannie Mae and Freddie
Mac had no material impact on either firm's financial results given
that both firms suffered aggregate losses of $93.6 billion in 2009. As
of October 8, 2010, $111.3 million and $79 million have been expended
through Treasury's TARP financial agency agreements with Fannie Mae and
Freddie Mac, respectively. This represents 2.2 percent of Fannie Mae's
and 0.5 percent of Freddie Mac's 2009 net revenue. While the $111.3
million expended under the TARP contract with Fannie Mae represented
14.4 percent of the firm's $773 million earned from fees and other
income in 2009, the amount is still diminutive when compared to total
revenues.
Drilling down further, looking at pre-crisis net revenue for each
firm, the expended amount of the Fannie Mae TARP contract represented
1.0 percent of the average 2004-2006 net revenue while the expended
amount of the Freddie Mac TARP contract constituted 1.2 percent of
2004-2006 net revenues. Net revenues are calculated here as the sum of
net interest income and non-interest income. Federal National Mortgage
Association, Form 10-K for the Fiscal Year Ending December 31, 2009, at
262 (Feb. 26, 2010) (online at www.sec.gov/Archives/edgar/data/310522/
000095012310018235/w77413e10vk.htm); Federal Home Loan Mortgage
Corporation, Form 10-K for the Fiscal Year Ended December 31, 2009, at
57 (Apr. 12, 2010) (online at www.sec.gov/Archives/edgar/data/1026214/
000102621410000019/f71244e10vkza.htm); Federal National Mortgage
Association, Form 10-K for the Fiscal Year Ending December 31, 2006, at
F-4 (Aug. 26, 2007) (online at www.sec.gov/Archives/edgar/data/310522/
000095013307003508/w36762e10vk.htm); Federal Home Loan Mortgage
Corporation, 2006 Annual Report, at 96 (2006) (online at
www.freddiemac.com/investors/ar/pdf/2006annualrpt.pdf).
---------------------------------------------------------------------------
To minimize the potential conflict between bank regulators
and policymakers, financial agent and contracting decisions are
vested with non-regulatory offices within Treasury (i.e.,
outside the Office of the Comptroller of the Currency and the
Office of Thrift Supervision), with determinations made by
career government officials rather than policy officials or
political appointees.\79\
---------------------------------------------------------------------------
\79\ See Section E.2, infra, for discussion of Treasury's internal
controls.
---------------------------------------------------------------------------
4. Unique Backdrop Weighed Heavily on Determinations
An assessment of Treasury's decisions to seek outside help
with implementing and managing TARP versus staffing projects
internally must necessarily be viewed in the context of the
emergency backdrop following the passage of EESA. This backdrop
understandably altered the decision tree that would have
otherwise held sway. The expertise, infrastructure, and
associated time-to-market required for Treasury to achieve the
necessary scale within its infrastructure were compromised by
the fast-moving nature of the crisis. This process was further
complicated by the broad fallout of the crisis, which arguably
left few financial institutions (and potential contractors or
financial agents) that could claim not to have benefited from
either direct or indirect government support.\80\ Finally,
building a significant in-house infrastructure would not have
been consistent with the intent of EESA, which established TARP
as a temporary program to stabilize the financial system.
Accordingly, the actions by Treasury reflect a bias to push
hard to mitigate potential conflicts versus building out
internal resources or leveraging other government agencies.
---------------------------------------------------------------------------
\80\ The statute's language is somewhat ambiguous as to whether
Treasury can seek the assistance of non-U.S. financial agents and
contractors. A financial institution is defined as an institution
``established and regulated under the laws of the United States . . .
and having significant operations in the United States, but excluding
any central bank of, or institution owned by, a foreign government.''
12 U.S.C. 5202(5). This definition might be read to include a financial
institution incorporated and regulated in the United States, but owned
by a non-U.S. institution.
Treasury's financial agency agreement with AllianceBernstein, a
subsidiary of a French holding company (AXA), is the only example of a
financial agency agreement with a foreign-owned institution
(AllianceBernstein, in turn, subcontracted work to the U.S. subsidiary
of Deutsche Bank). EESA's financial institution definition does not
apply to contracting, which can include non-financial institutions.
However, the governing language on the contracting side permits foreign
contracting under certain circumstances (e.g., Federal Acquisition
Regulation, at Subpart 25).
In any case, as explored in the Panel's August 2010 report,
national distinctions in the global financial marketplace are
increasingly difficult to delineate, given the cross-border nature of
markets and operations. See Congressional Oversight Panel, August
Oversight Report: The Global Context and the International Effects of
the TARP (Aug. 12, 2010) (online at cop.senate.gov/documents/cop-
081210-report.pdf) (hereinafter ``August 2010 Oversight Report'').
---------------------------------------------------------------------------
D. Description of Contracts and Agreements
There are 81 TARP-related procurement contracts awarded
pursuant to the FAR and 15 financial agency agreements awarded
pursuant to the financial agent authority granted under
EESA.\81\ Under these arrangements, there are a total of 98
subcontracts, 40 of which are procurement contracts, and the
remaining 58 of which are financial agency agreements.\82\ The
principal metrics used to describe the contracts and agreements
are ``obligated value'' and ``expended value.'' ``Obligated
value'' is the amount that Treasury is obliged to pay, provided
that the contractor or financial agent performs in accordance
with the terms of the arrangement, \83\ while ``expended
value'' is the amount that Treasury owes for goods and services
already delivered under the contract or agreement.\84\ The
obligated value of these contracts and agreements is $436.7
million, with $109.3 million attributable to procurement
contracts and $327.4 million attributable to financial agency
agreements.\85\ The expended value under these contracts and
agreements totals $363.0 million, with procurement contracts
accounting for $87.0 million and financial agency agreements
accounting for the remaining $276.0 million.
---------------------------------------------------------------------------
\81\ Unless otherwise noted, all information in this Section was
derived from data updated through September 30, 2010 and provided by
Treasury to the Panel staff (Oct. 8, 2010). Base contracts, novations,
modifications, and task orders all count as a single contract. However,
task orders under Treasury contracts for Phacil Inc. and the MITRE
Corporation were counted as separate contracts. There were two
novations, a contract with the law firm Thacher Proffitt & Wood was
novated to a contract with Sonnenschein Nath & Rosenthal LLP, and a
contract with McKee Nelson LLP was novated to Bingham McCutchen LLP.
For the purposes of this analysis, the novations count as a single
contract. The total number of procurement contracts includes eight
contracts, which were awarded by other branches within the Procurement
Services Division pursuant to a common Treasury service level and
subject to a reimbursable agreement with the Office of Financial
Stability, or were awarded by other agencies on behalf of the Office of
Financial Stability and not administered by the Procurement Services
Division. The obligated and expended values of these eight contracts
are approximately $477,000 and $143,000, respectively. These contracts
were not included in the analysis in Sections D.1 and F, infra.
\82\ The information on subcontractors was derived solely from
information produced by Treasury. For procurement contracts the
information is as of July 31, 2010. Treasury indicated that it is the
responsibility of the prime contractor to report any information on the
subcontracts and the subcontractors. Treasury's view is that since
there is no privity of contract between Treasury and the
subcontractors, financial agents and contractors are responsible for
the management of the subcontractors. For the financial agency
agreements, Fannie Mae engaged several subcontractors not listed, but
payment was made to them based on arrangements between Fannie Mae and
OFS. Treasury conversations with Panel staff (Sept. 16, 2010). See
Sections D.1.f and D.2.b, infra.
\83\ For procurement contracts, the obligated value is the value
indicated on either the contract or task order. In a fixed price
contract, the contractor is entitled to invoice for the full obligated
value (the negotiated price), however, for labor hour or time and
materials contracts, the contractor can only invoice for the hours
actually worked plus allowable and allocable costs incurred. For
financial agency agreements, the obligated value represents the funds
that are specifically allocated by Treasury to a given agreement based
on Treasury's estimate of the funds that will be earned pursuant to the
compensation terms of the financial agency agreements. Treasury
conversations with Panel staff (Oct. 4, 2010).
\84\ The expended value includes both the value that has been
invoiced by the contractor/financial agent and, to the extent Treasury
has the information, work that has been performed but has yet to be
invoiced. Treasury conversations with Panel staff (Sept. 16, 2010 and
Oct. 4, 2010).
\85\ Interagency agreements were not included in this analysis.
These agreements have an obligated value of $76.5 million, and the bulk
of that value relates to office space, personnel, various
administrative functions, and oversight, including $53.5 million for
administrative support in the form of financial management, human
resources, information technology, general counsel and other
reimbursable support services and $23.0 million in oversight costs.
However, $7.8 million of that obligated value stems from an agreement
between Treasury and the Pension Benefit Guarantee Corporation, which
then subcontracted that financial advisory services work for the TARP's
Automotive Industry Financing Program (AIFP) to Rothschild, Inc.
Documents provided by Treasury to Panel staff (Oct. 8, 2010).
---------------------------------------------------------------------------
In terms of obligated value, Fannie Mae is the largest
financial agent, with $126.7 million, while
PricewaterhouseCoopers LLP (PricewaterhouseCoopers) is the
largest contractor, with $25.8 million of obligated value.
Figure 1 lists the largest contractors and financial agents
providing services under different arrangements with OFS.
FIGURE 1: LARGEST CONTRACTORS AND FINANCIAL AGENTS BY OBLIGATED VALUE
----------------------------------------------------------------------------------------------------------------
Potential
Contractor Type of Arrangement Obligated Value Contract Value Expended Value
\86\ \87\
----------------------------------------------------------------------------------------------------------------
Fannie Mae....................... Financial Agency $126,712,000 ................. $111,339,451
Agreement.
Freddie Mac...................... Financial Agency 88,850,000 ................. 79,296,499
Agreement.
The Bank of New York Mellon Corp. Financial Agency 28,495,412 ................. 23,777,002
Agreement.
PricewaterhouseCoopers LLP....... Contract............ 25,781,474 $50,252,231 23,525,631
Morgan Stanley & Co.............. Financial Agency 23,577,000 ................. 13,175,423
Agreement.
AllianceBernstein L.P............ Financial Agency 22,399,943 ................. 21,207,253
Agreement.
Cadwalader Wickersham & Taft LLP. Contract............ 21,939,919 147,645,619 19,069,083
Ernst & Young LLP................ Contract............ 11,397,968 33,391,392 10,710,092
FSI Group LLC.................... Financial Agency 11,102,500 ................. 10,770,000
Agreement.
Simpson Thacher & Bartlett LLP... Contract............ 10,827,988 21,025,000 5,479,614
Total........................ .................... $371,084,204 N/A $318,350,048
----------------------------------------------------------------------------------------------------------------
\86\ See footnote 89, infra, for a more complete discussion of the term ``potential contract value.''
\87\ The expended value does not include $3.9 million attributable to Cadwalader as a subcontractor under a
procurement agreement and $3.4 million and $21.5 million to PricewaterhouseCoopers and Ernst & Young,
respectively, for subcontract work performed under financial agency agreements.
A complete list of the procurement contracts and financial
agency agreements appears as Annex II to this report.
1. Procurement Contracts
To date, Treasury has entered into 73 procurement contracts
with 53 contractors; 46 of those contracts are currently
active.\88\ The total obligated value under all the procurement
contracts is $108.8 million, and the total potential contract
value is $407.3 million.\89\ Active contracts account for
$282.5 million of the remaining potential contract value.\90\
---------------------------------------------------------------------------
\88\ Eight contracts, which were awarded by other branches within
the Procurement Services Division pursuant to a common Treasury service
level and subject to a reimbursable agreement with the Office of
Financial Stability, or were awarded by other agencies on behalf of the
Office of Financial Stability and not administered by the Procurement
Services Division with a total obligated value of approximately
$477,000, were not considered as part of this analysis. The five
contracts with other branches of the procurement services division were
with American Furniture Rentals, Immix Technology (two contracts),
Heery International, and the Washington Post. In addition the other
three contracts were entered into with the IRS and they were with CSC
Systems and Solutions, Turner Consulting and KnowledgeBank. Active
contracts are those contracts that have a performance end date after
September 30, 2010.
\89\ The ``potential contract value'' is the program ceiling for
task or delivery order contracts and the total amount of the award for
definitive contracts. For the three contracts without a ceiling, it was
assumed that the potential contract value was equal to the potential
contract values that Treasury indicated were recorded on task orders
and modifications. For multiple contract awards, the total program
value is counted once for aggregate numbers, while on an individual
basis the potential contract value is included for each awardee as if
it would receive task orders for the full amount of the award. Language
in many of the contracts indicates that a firm could receive the entire
award. For example, in each of the three contracts for a multiple award
with a total potential contract value of $20,687,500, the contract
stated that, ``the contract ceiling value of all contracts awarded
under this solicitation, individually and collectively, is
$20,687,500.'' See, e.g., U.S. Department of the Treasury, Contract
Between U.S. Department of the Treasury and Debevoise & Plimpton, LLP
(July 30, 2009) (Contract No. TOFS-09-D-0012) (online at
www.financialstability.gov/docs/ContractsAgreements/
Debevoise%20&%20Plimpton.pdf) (hereinafter ``Contract Between Treasury
and Debevoise & Plimpton''). However, each awardee under a multiple
award IDIQ contract must receive a guaranteed minimum; therefore the
total potential contract value is slightly less than the full program
amount. Since these amounts are relatively small (and not always
denoted in terms of dollars), they were not factored into the potential
contract ceilings used. Treasury indicated that it would be unlikely
that one contractor would receive the full potential contract value in
a multiple award contract or that, in fact, the full potential value of
the program would be expended. However, Treasury also indicated that if
one firm consistently proposes outstanding technical or management
approaches, a positive record of past performance, and competitive
pricing, they may win more task orders than other contractors. Treasury
conversations with Panel staff (Sept. 28, 2010 and Oct. 4, 2010).
\90\ This amount is calculated by subtracting the obligated value
from the potential contract value for all contracts with a performance
end date after September 30, 2010. The remaining potential contract
value does not include the potential contract value for the three
contracts without ceilings. Four of the multiple award contracts
account for $235.4 million of the remaining potential contract value.
---------------------------------------------------------------------------
a. Types of Procurement Contracts
Treasury's procurement contracts have two different
structures: (i) task or delivery order contracts; and (ii)
definitive contracts.\91\ Task or delivery order contracts are
structured such that exact times and exact quantities of future
deliveries and services are not known at the time of the
contract award, and that information is supplied later through
the use of task and/or delivery orders.\92\ Task or delivery
order contracts do not have fixed fees for services, and the
value of the contracts appears in the specific task orders and
modifications to those contracts.\93\ For example, OFS's
contract with Debevoise & Plimpton for restructuring legal
services is a task or delivery order contract.\94\
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\91\ For the purposes of this analysis, ``task or delivery order
contracts'' includes both contracts classified as indefinite delivery/
indefinite quantity (IDIQ) contracts and blanket purchase agreements
(BPAs) placed against multiple award schedules under the FAR. Federal
Acquisition Regulation, supra note 11, at Subparts 16.504 and 8.405-3.
The principal difference derives from the sourcing; IDIQ contracts are
new contracts formed for a specific purpose based on a ``statement of
work,'' whereas BPAs piggyback on existing government contracts found
on the GSA Schedule. See Section D.1.d, infra.
\92\ Under the FAR, an IDIQ contract ``provides for an indefinite
quantity, within stated limits, of supplies or services during a fixed
period'' and a BPA is a mechanism used to ``fill repetitive needs.''
Federal Acquisition Regulation, supra note 11, at Subparts 16.50(a) and
8.405-3.
\93\ See Federal Acquisition Regulation, supra note 11, at Subparts
8.405-3, 16.504, 16.505, and 16.702. However, the IDIQ contracts are
required to have a minimum amount that is not de minimis. For instance,
for the legal contracts, the minimum has been expressed in terms of
dollar amounts and hours of work. A contract with the law firm
Debevoise & Plimpton LLP had a minimum dollar amount of $25,000, while
a contract with the law firm of Sonnenschein Nath & Rosenthal LLP has a
guaranteed minimum of 100 labor hours. See, e.g., Contract Between
Treasury and Debevoise & Plimpton, supra note 89; U.S. Department of
the Treasury, Contract Between U.S. Department of the Treasury and
Sonnenschein Nath & Rosenthal, LLP (Dec. 10, 2008) (Contract No. TOS09-
014C) (online at www.financialstability.gov/docs/ContractsAgreements/
Sonnenschein%20TOS09-014C%20redacted.pdf).
\94\ Contract Between Treasury and Debevoise & Plimpton, supra note
89. There has been one modification under this contract (to extend the
contract term) and one task order with an obligated value of $159,175.
---------------------------------------------------------------------------
OFS designates contracts with defined terms as definitive
contracts.\95\ OFS has entered into the following types of
definitive contracts: cost-reimbursement plus fixed price,
fixed price, fixed price or time, and materials and labor-hour.
Fixed price contracts have been used, for example, for the
purchase of office equipment.\96\
---------------------------------------------------------------------------
\95\ Federal Acquisition Regulation, supra note 11, at Subparts
16.2, 16.3, and 16.6.
\96\ U.S. Department of the Treasury, Contract Between U.S.
Department of the Treasury and Herman Miller, Inc. (Apr. 17, 2009)
(Contract No. TOFS-09-O-0003) (online at www.financialstability.gov/
docs/ContractsAgreements/Herman%20Miller.pdf); U.S. Department of the
Treasury, Contract Between U.S. Department of the Treasury and Whitaker
Brothers Business Machines, Inc. (Jan. 27, 2009) (Contract No.
TDOX090038) (online at www.financialstability.gov/docs/
ContractsAgreements/
Whitaker%20Brothers%20Bus%20Machines%20Contract.pdf).
---------------------------------------------------------------------------
OFS has awarded 48 task or delivery order contracts and 25
definitive contracts, accounting for obligated values of $101.9
million and $6.9 million, and potential contract values of
$398.1 million and $9.2 million, respectively.\97\
---------------------------------------------------------------------------
\97\ See Section B, supra. Based on the information provided by
Treasury, the Phacil task order was considered a task or delivery order
contract and the MITRE arrangement was considered a definitive
contract. For this analysis, the contract with Locke Lord Bissell &
Liddell, LLP was considered a task or delivery order contract, based on
the language of the contract even though it was classified as a
definitive contract by Treasury. U.S. Department of the Treasury,
Contract Between U.S. Department of the Treasury and Locke Lord Bissell
& Liddell, LLP (Feb. 12, 2009) (Contract No. TOS0922) (online at
www.financialstability.gov/docs/ContractsAgreements/
Locke%20CONTRACT(FINAL)%2002,12,09.pdf). The difference between the
obligated and potential values for the definitive contracts is
primarily due to the availability of options under two contracts; one
for the lease of parking spaces and the other for a subscription for
financial, regulatory and market data, and services. See U.S.
Department of the Treasury, Contract Between U.S. Department of the
Treasury and Colonial Parking, Inc. (Jan. 7, 2009) (Contract No. TOS09-
017) (online at www.financialstability.gov/docs/ContractsAgreements/
Colonial%20Parking,%20Inc.%20Contract.pdf); U.S. Department of the
Treasury, Contract Between U.S. Department of the Treasury and Colonial
Parking, Inc. (Sept. 30, 2009) (Contract No. TOFS-09-O-0016) (online at
www.financialstability.gov/docs/ContractsAgreements/
Colonial%20Parking,%20Inc.%20Contract.pdf).
---------------------------------------------------------------------------
The majority of the task or delivery order contracts have
potential contract values.\98\ Of the 48 task or delivery order
contracts, 45 have these ceilings, \99\ and three have no
potential contract value specified in the base contracts.\100\
The potential contract values range from $250,000 to $100.0
million.
---------------------------------------------------------------------------
\98\ Under the FAR, IDIQ contracts have a ``stated limit'' where
quantity limits may be stated as number of units or as dollar values;
however, BPAs ``shall address the frequency of ordering, invoicing,
discounts, requirements (e.g. estimated quantities, invoicing,
discounts, requirements (e.g. estimated quantities, work to be
performed), delivery locations, and time.'' Federal Acquisition
Regulation, supra note 11, at Subpart 16.50.
\99\ Twelve contracts have been modified to increase the potential
contract value.
\100\ All three of those task or delivery order contracts are BPAs
that were awarded under a GSA Schedule Competition. The contracts were
with PricewaterhouseCoopers LLP, Ernst & Young LLP, and FI Consulting
Inc. with obligated values of $24.5 million, $11.4 million, and $1.9
million, respectively. U.S. Department of the Treasury, Blanket
Purchase Agreement Between U.S. Department of the Treasury and
PricewaterhouseCoopers (Oct. 8, 2008) (Contract No. T2009-TARP-0001)
(online at www.financialstability.gov/docs/ContractsAgreements/
PWC%20T2009TARP0001%20redacted.pdf); U.S. Department of the Treasury,
Blanket Purchase Agreement Between U.S. Department of the Treasury and
Ernst & Young, LLP (Oct. 18, 2008) (Contract No. T2009-TARP-0002)
(online at www.financialstability.gov/docs/ContractsAgreements/
ErnstYoung%202009-TARP-0002%20redacted.pdf); U.S. Department of the
Treasury, Contract Between U.S. Department of the Treasury and FI
Consulting, Inc. (Mar. 31, 2009) (Contract No. TOFS-09-B-0001) (online
at www.financialstability.gov/docs/ContractsAgreements/
FI%20Consulting.pdf).
---------------------------------------------------------------------------
OFS has awarded 25 definitive contracts awarded to specific
contractors.\101\ The total obligated value and total potential
contract value under these contracts is $6.9 million and $9.2
million, respectively. The potential value under these
contracts ranges from less than $3,000 to $2.7 million.
---------------------------------------------------------------------------
\101\ A complete list of these contracts is included as Annex II,
infra.
---------------------------------------------------------------------------
The FAR uses different mechanisms to foster competition.
For example, for task or delivery order contracts not issued
under the GSA schedule, the FAR encourages multiple award
contracts.\102\ Furthermore, when contracts are issued under
multiple award task or delivery order contracts or the GSA
schedule, unless an exemption applies, the FAR requires that
there be a fair opportunity for all eligible contractors to
compete.\103\ Under a multiple award contract, contract awards
are made to two or more contractors under a single
solicitation. Seven multiple awards account for 30 of the 48
task or delivery order contracts. The potential program values
of the multiple awards range from $5.0 million to $100.0
million, and the total value of these contract awards is $289.2
million. Of the $42.3 million in obligated value under the
multiple awards, $17.5 million is attributable to legal
services for the Automotive Industry Financing Program
performed by Cadwalader.\104\
---------------------------------------------------------------------------
\102\ For IDIQ contracts, with a few exceptions, for advisory and
assistance services, which exceed three years and $10 million, a
contracting officer is required to make multiple awards. Federal
Acquisition Regulation, supra note 11, at Subpart 16.50. See footnotes
92 and 98, supra, for the distinction between IDIQ contracts and BPAs.
\103\ Federal Acquisition Regulation, supra note 11, at Subpart
16.504(c).
\104\ See Section D.1.e, infra.
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b. Programs to which Contracts Relate
Some procurement contracts relate to a specific TARP
program, while others have been categorized as relating to
multiple programs and program operations.\105\ However, three
of the contracts designated as applying to multiple programs
have task orders issued under them for specific programs, and
one contract designated for the Automotive Industry Financing
Program has an obligated value of $3.6 million relating to work
on the Small Business Administration 7(a) Loan Program.\106\ Of
the 73 contracts, 21 relate to one TARP program, and 52
contracts relate to multiple TARP programs (including program
operations).\107\ Work for the Automotive Industry Financing
Program was performed under seven contracts, for an obligated
value of $24.3 million. The following table details the
obligated value and the potential contract value by program.
---------------------------------------------------------------------------
\105\ Program operations includes services that relate to all TARP
programs, including FOIA and IT services. Treasury conversations with
Panel staff (Oct. 4, 2010).
\106\ Work for CPP, PPIP and CAP was performed under multiple
program contracts. The obligated value for the CPP, PPIP and CAP work
was $5.7 million and $3.0 million and $2.6 million, respectively.
However, the potential contract value for these contracts is accounted
for under multiple programs.
\107\ Five contracts identified as relating to ``antifraud,''
administrative services, or not identifying a specific program were
included in the Program Operations category. These contracts accounted
for less than $30,000 in obligated value and potential program value.
FIGURE 2: CONTRACT BREAKDOWN BY TARP PROGRAM \108\
----------------------------------------------------------------------------------------------------------------
Number of Potential
Program Contracts Obligated Value Contract Value
----------------------------------------------------------------------------------------------------------------
Multiple Programs............................................ 38 $47,845,708 $233,652,903
Automotive Industry Financing Program (AIFP)................. 7 24,320,992 37,888,603
Capital Purchase Program (CPP)............................... 6 14,794,781 12,880,161
Public-Private Investment Program (PPIP)..................... 4 8,292,540 2,897,400
Program Operations........................................... 18 4,402,477 115,604,144
SBA 7(a) Securities Purchase Program......................... 3 4,007,085 1,870,626
Capital Assistance Program (CAP)............................. 2 2,612,032 0
Home Affordable Modification Program (HAMP).................. 3 2,507,251 2,507,251
Total \109\.............................................. N/A $108,782,867 $407,301,088
----------------------------------------------------------------------------------------------------------------
\108\ It is possible for the potential contract value to be less than the obligated value. This is because all
of the obligated value for task or delivery order contracts is attributable to the task and delivery orders,
while the potential contract value stems from the base contract and modifications that increased the contract
ceiling, if any. Furthermore, there are instances where task orders under a contract specify a program while
the base contract lists the program as a multiple program. For example, the obligated value under the CAP, a
program that was never implemented, stems from task orders created under a base contract for multiple
programs, therefore there is the anomalous situation of having obligated value for a program while there is no
potential contract value for that program.
\109\ The total number of contracts will exceed the actual number of procurement contracts as work performed
under several programs will count as a contract under each of those programs.
c. Type of Work Performed under Procurement Contracts
Seven categories of work are performed under the TARP
procurement contracts. Of the 73 contracts, 35 are for legal
advisory work. Legal advisory work accounts for the largest
obligated and potential contract values, $55.6 million and
$203.4 million, respectively. The following table details the
obligated and potential contract value of the procurement
contracts by category of work.
FIGURE 3: PROCUREMENT CONTRACT BREAKDOWN BY TYPE OF WORK PERFORMED
----------------------------------------------------------------------------------------------------------------
Number of Potential Contract
Category Contracts Obligated Value Value
----------------------------------------------------------------------------------------------------------------
Legal Advisory......................................... 35 $55,559,077 $203,375,064
Accounting/Internal Controls........................... 4 39,115,309 41,592,642
Financial Advisory..................................... 4 7,890,379 16,770,190
Information Technology................................. 5 3,942,820 101,200,526
Administrative Support................................. 17 2,017,870 21,737,430
Facilities Support..................................... 4 257,412 631,812
Compliance............................................. 4 0 21,993,424
Total.............................................. 73 $108,782,867 $407,301,088
----------------------------------------------------------------------------------------------------------------
d. Competition
Treasury used a competitive process to select the
contractors. Under the FAR, contracts must be made through full
and open competition, unless there is an exemption.\110\
Permitted exemptions allow for limited competition during
circumstances of unusual and compelling urgency.\111\ Contracts
issued under the GSA Schedule are considered to be issued under
full and open competition.\112\ The following table details the
obligated and potential contract value based on the method for
awarding the original base contract. GSA Schedule awardees
accounted for the largest obligated and potential contract
value at $54.9 million and $193.0 million, respectively.\113\
---------------------------------------------------------------------------
\110\ Federal Acquisition Regulation, supra note 11, at Subpart
6.2.
\111\ Federal Acquisition Regulation, supra note 11, at Subpart
6.302-2.
\112\ See Federal Acquisition Regulation, supra note 11, at
Subparts 8.404 and 6.10.
\113\ GSA establishes long-term government wide contracts with
commercial firms, and those contracts are listed on the GSA schedule,
creating a simplified process so that simplified process for obtaining
commercial supplies and services at prices associated with volume.
Sourcing through the GSA Schedule is required before sourcing through
general commercial providers. Federal Acquisition Regulation, supra
note 11, at Subparts 8.002 and 8.4.
FIGURE 4: PROCUREMENT CONTRACT BREAKDOWN BY COMPETITION AT SELECTION \114\
----------------------------------------------------------------------------------------------------------------
Number of Potential
Competition Contracts Obligated Value Contract Value
----------------------------------------------------------------------------------------------------------------
GSA Schedule Competition..................................... 22 $54,861,486 $193,033,966
Limited Competition--Unusual and Compelling Urgency.......... 19 50,131,135 86,471,942
Full and Open with Small Business Set-aside.................. 13 1,997,820 99,791,842
Full and Open................................................ 10 953,782 21,214,694
Sole Source--Only Responsible Source......................... 3 750,526 750,526
Full and Open after Exclusion of Sources (Total Small 1 50,000 6,000,000
Business Set-Aside).........................................
SAP--Competed \115\.......................................... 2 24,975 24,975
SAP--Not Competed \116\...................................... 2 9,930 9,930
GSA Schedule--Sole Source.................................... 1 3,213 3,213
Total.................................................... 73 $108,782,867 $407,301,088
----------------------------------------------------------------------------------------------------------------
\114\ Task orders and modifications are grouped by the form of competition for the initial base contract. One
contract from Treasury (TOS09-007) was classified as a GSA Schedule Competition with a task order indicating
Limited Competition. The potential contract value on the base contract was $500,000, and the contract was
analyzed as a limited competition contract.
\115\ SAP or simplified acquisition procedure is used for purchases under a certain dollar threshold. Federal
Acquisition Regulation, supra note 11, at Part 13.
\116\ Federal Acquisition Regulation, supra note 11, at Part 13.
e. Largest Contractors
The largest contractor in terms of obligated value is
PricewaterhouseCoopers. PricewaterhouseCoopers was the
recipient of three contracts, one of which for internal
controls has $24.5 million in obligated value, $22.4 million of
which has been expended. In addition, PricewaterhouseCoopers
has been granted one of the multiple awards for program
compliance support services, with a potential program value of
$22.0 million.
The largest contractor in terms of potential contract value
was Cadwalader.\117\ Cadwalader has four contracts, two of
which are currently active. Under these contracts, Cadwalader
has $21.9 million in obligated value, $19.1 million of which
has been expended by the Treasury. These contracts include a
multiple award contract. Cadwalader was one of 13 law firms
awarded a contract for the omnibus procurement for legal
services; the total potential program value for the 13
contracts is $99.8 million. In addition, Cadwalader worked as a
subcontractor under another law firm's contract with Treasury.
To date, the expended value of this subcontract is $3.9
million.
---------------------------------------------------------------------------
\117\ The total expended value attributed to Cadwalader as the
prime contractor, from the onset of the program until September 30,
2010, is equivalent to 4.2 percent of the firm's total revenue in 2009.
The amount of funds expended under the contract is used in the
calculation of this ratio rather than the obligated amount in order to
provide a more accurate reflection of its impact on firm revenue. Data
on amounts expended provided by Treasury (Oct. 8, 2010); American
Lawyer, The Am Law 100 2010--Gross Revenue: Baker & McKenzie Tops
Skadden (online at www.law.com/jsp/tal/
PubArticleTAL.jsp?id=1202448484841) (accessed Oct. 12, 2010).
Cadwalader indicated that the rate it billed Treasury was a ``30%
discount from the firm's 2009 median rate for each professional
category as determined in accordance with the guidelines issued by the
governing professional bodies that include a variety of factors leading
to the establishment of billing rates for similar matters of similar
complexity and with similar demands on the firm and its resources.''
Data provided by Treasury and Cadwalader to Panel staff (Oct. 5, 2010).
Cadwalader invoiced Treasury $525 per hour for partners (partners
normally charge $625 to $1,050 per hour), $287.50 per hour for
associates (normally charged out at a rate of $310 to $575) and $440
per hour for special counsel (normally charged out at a rate of $590 to
$880 per hour). Treasury documents provided to Panel staff (Oct. 8,
2010).
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Ernst & Young has the largest amount of expended value
attributable to its work. Ernst & Young has performed work as a
contractor under a procurement contract as well as a
subcontractor under financial agency agreements. Of the $32.2
million in expended value attributable to Ernst & Young, $10.7
million is related to a procurement contract for accounting
services, and $21.5 million is related to subcontracts under
financial agency agreements, $17.7 million of which was
expended under a subcontract with Freddie Mac and the remaining
$3.8 million was expended under a subcontract with Fannie Mae.
In addition, Ernst & Young has been granted the same $22.0
million multiple awards as PricewaterhouseCoopers.
Cadwalader had the largest concentration of legal work. In
terms of obligated and expended value, respectively, Cadwalader
accounts for 39 percent and 48 percent of all the legal
advisory work under TARP.\118\ Approximately 80 percent of
Cadwalader's obligated value and 90 percent of its expended
value stems from Cadwalader's role as lead counsel for the
Automotive Industry Financing Program.\119\ Although some firms
have argued that TARP legal work should have been awarded to a
larger number of firms, some of these contracts by their nature
are not easily divisible due in part to the need for
coordination across different practice areas and disciplines
required in time-sensitive, complex financial transactions.
Four law firms accounted for approximately 80 percent of the
legal work on an obligated and expended value basis.\120\
---------------------------------------------------------------------------
\118\ These amounts do not include the $3.9 million that was
expended to Cadwalader under a subcontract.
\119\ Treasury conversations with Panel staff (Sept. 28, 2010).
\120\ The four largest law firms as a percentage of obligated and
expended value, respectively were: Cadwalader (39 percent, 48 percent);
Simpson Thacher & Bartlett LLP (19 percent, 14 percent); Squire Sanders
& Dempsey LLP (13 percent, 8 percent); and Sonnenschein Nath &
Rosenthal LLP (9 percent, 12 percent).
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For accounting and internal control work, there was a more
significant amount of concentration. Together, Ernst & Young
and PricewaterhouseCoopers performed 95 percent of this work in
terms of obligated value, with PricewaterhouseCoopers
accounting for 66 percent of the total obligated value.
f. Subcontracts
There are 40 subcontracts under 12 procurement
contracts.\121\ The total value of these subcontracts is $11.3
million dollars, with an average contract value of $0.3
million. The largest obligated value under a subcontract is
$3.9 million to Cadwalader for legal services.
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\121\ A table of the subcontracts is attached as Figure 12 in Annex
II, infra.
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2. Financial Agency Agreements
There are currently 15 financial agency agreements and 58
subcontracts.\122\ The obligated value under these agreements
is $327.4 million, and the expended value for these agreements
is $276.0 million. The largest obligated value under an
agreement is with Fannie Mae for $126.7 million. Figure 5 lists
the financial agency agreements in order of obligated
value.\123\
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\122\ The agreements are listed in Figure 13 in Annex II, infra.
Some of these agreements have incentive clauses or provide that an
incentive arrangement will be established within a year. See generally,
U.S. Department of the Treasury, Financial Agency Agreement Between
U.S. Department of the Treasury and FSI Group, LLC (Apr. 20, 2009)
(Contract No. TOFA-09-FAA-0006) (online at www.financialstability.gov/
docs/ContractsAgreements/
FSI%20FAA%20Equity%20Asset%20Manager%20FINAL.pdf) (hereinafter
``Financial Agency Agreement Between U.S. Department of the Treasury
and FSI Group, LLC''). For example, both Fannie Mae and Freddie Mac
were eligible to receive incentive payments, up to 20 percent, based on
specified metrics determined by Treasury. Neither GSE has received any
incentive pay under these agreements. U.S. Department of the Treasury,
Financial Agency Agreement Between U.S. Department of the Treasury and
Fannie Mae (Feb. 18, 2009) (Contract No. TOFA-09-FAA-0002) (online at
www.financialstability.gov/docs/ContractsAgreements/
Fannie%20Mae%20FAA%20021809%20.pdf) (hereinafter ``Financial Agency
Agreement Between U.S. Department of the Treasury and Fannie Mae'');
U.S. Department of the Treasury, Financial Agency Agreement Between
U.S. Department of the Treasury and Freddie Mac (Feb. 18, 2009)
(Contract No. TOFA-09-FAA-0003) (online at www.financialstability.gov/
docs/ContractsAgreements/
Freddie%20Mac%20Financial%20Agency%20Agreement.pdf) (hereinafter
``Financial Agency Agreement Between Treasury and Freddie Mac'');
Treasury conversations with Panel staff (Sept. 16, 2010).
\123\ These companies are considered together because they are all
financial agents. Treasury formed financial agency agreements with
entities with which it needed a fiduciary relationship. For instance,
Treasury decided it required this type of relationship with
AllianceBernstein for its asset management services, BNY Mellon for its
custodial work, and Fannie Mae and Freddie Mac for their role in the
administration and compliance of HAMP.
FIGURE 5: FINANCIAL AGENCY AGREEMENTS
----------------------------------------------------------------------------------------------------------------
Financial Agent Description Obligated Value Expended Value
----------------------------------------------------------------------------------------------------------------
Fannie Mae................................. HAMP Administration.......... $126,712,000 $111,339,451
Freddie Mac................................ HAMP Compliance.............. 88,850,000 79,296,499
The Bank of NY Mellon Corporation.......... Custodian.................... 28,495,412 23,777,002
Morgan Stanley & Co........................ Disposition Services......... 23,577,000 13,175,423
AllianceBernstein L.P...................... Asset Management Services.... 22,399,943 21,207,253
FSI Group LLC.............................. Asset Management Services.... 11,102,500 10,770,000
Lazard Freres & Co. LLC.................... Transaction Structuring 7,500,000 2,166,667
Services.
Piedmont Investment Advisors LLC........... Asset Management Services.... 5,615,000 5,120,000
KBW Asset Management, Inc.................. Asset Management Services.... 3,803,333 3,279,167
Earnest Partners........................... Small Business Assistance 4,050,000 1,955,000
Program.
Howe Barnes Hoefer & Arnett, Inc........... Asset Management Services.... 1,250,000 950,000
Lombardia Capital Partners, LLC............ Asset Management Services.... 1,250,000 937,500
Paradigm Asset Management Co., LLC......... Asset Management Services.... 1,250,000 925,000
Avondale Investments, LLC.................. Asset Management Services.... 750,000 562,500
Bell Rock Capital, LLC..................... Asset Management Services.... 750,000 575,000
Total.................................. ............................. $327,355,188 $276,086,462
----------------------------------------------------------------------------------------------------------------
a. Programs Using Financial Agency Agreements
The 15 financial agency agreements are categorized in
Figure 6, below, by the type of service provided. There are 12
agreements to provide asset services, two agreements for HAMP,
and one agreement for custodial services.\124\ There was a
variety of asset work, including asset management (for both the
CPP and SBA 7(a) program), disposition, and transaction
structuring services. The largest obligated and expended
values, $215.6 million and $190.6 million, respectively, are
for HAMP. Figure 6 details the obligated and expended values by
type of service provided.
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\124\ BNY Mellon performs custodial services for many of the TARP
programs, while the asset managers' work is related to assets from the
CPP, CDCI, SSFI, AIFP, and AGP portfolios. Data provided by Treasury to
Panel staff (Sept. 29, 2010).
FIGURE 6: FINANCIAL AGENCY AGREEMENT BREAKDOWN BY PROGRAM TYPE
----------------------------------------------------------------------------------------------------------------
Number of
Service Provided Contracts Obligated Value Expended Value
----------------------------------------------------------------------------------------------------------------
HAMP......................................................... 2 $215,562,000 $190,635,950
Asset Management Services.................................... 9 48,170,776 44,326,420
Custodian.................................................... 1 28,495,412 23,777,002
Disposition Agent............................................ 1 23,577,000 13,175,423
Transaction Structuring (AIFP)............................... 1 7,500,000 2,216,667
SBA 7(a) Program............................................. 1 4,050,000 1,955,000
Total.................................................... 15 $327,355,188 $276,086,462
----------------------------------------------------------------------------------------------------------------
The agreements provide for several different types of
payment structures. For instance, asset managers are
compensated with a flat fee for each financial institution
whose TARP assets they manage.\125\ BNY Mellon's arrangement is
more complex due the variety of services it provides for the
different programs and its compensation structure reflects this
mix. Its fee schedule includes flat fees, per transaction fees,
as well as variable fees.\126\
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\125\ For instance, the FSI Group, LLC receives a flat annual fee
for each financial institution whose assets it manages. The fee is
$50,000 for the first 50 financial institutions under management,
$40,000 for the next fifty, and $30,000 thereafter for each financial
institution with assets under FSI Group's management. Financial Agency
Agreement Between Treasury and Freddie Mac, supra note 122.
\126\ For instance, for CPP, BNY Mellon receives an annual rate of
0.0015 percent of the daily average aggregate acquisition value of
specified financial instruments in its custody. Financial Agency
Agreement Between Treasury and Freddie Mac, supra note 122.
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b. Subcontractors
Six financial agents engaged a total of 58 subcontractors
for a reported subcontract value of $81.7 million.\127\ Freddie
Mac used the most subcontractors at 26 for an expended value of
$43.2 million. The average expended value per subcontract was
$1.4 million and ranged from $7,000 to $17.8 million. Freddie
Mac engaged Ernst & Young for an expended value of $17.8
million for business process support.
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\127\ The subcontractor information is reported by the financial
agents to Treasury and is as of August 31, 2010. Two of the
subcontractors were engaged by two different financial agents. Ernst &
Young was engaged by both Fannie Mae and Freddie Mac, which accounted
for an expended value of $21.5 million, while Williams, Adley &
Company, LLP was engaged by BNY Mellon and Freddie Mac for a total
expended value of $1.2 million.
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c. Largest Financial Agents
The five largest financial agents were Fannie Mae, Freddie
Mac, BNY Mellon, Morgan Stanley, and AllianceBernstein L.P.
Both BNY Mellon and Morgan Stanley received TARP funds through
the CPP.\128\ All five financial agents are U.S. companies,
although AllianceBernstein is a subsidiary of AXA, a French
holding company. Fannie Mae was the single largest financial
agent with $126.7 million in obligated value and $111.3 million
in expended value as part of HAMP.\129\ For HAMP, Fannie Mae
reported that it engaged 15 subcontractors, which accounted for
$28.9 million of its expended value.\130\
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\128\ On October 28, 2008, Treasury purchased $3 billion of
preferred stock with warrants in BNY Mellon and $10 billion of
preferred stock with warrants in Morgan Stanley. BNY Mellon and Morgan
Stanley both repaid Treasury's investment on June 17, 2009. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending September 30, 2010, at 1 (Oct. 4, 2010)
(online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf) (hereinafter
``Treasury Transactions Report'').
\129\ For further discussion of the size and effect of the TARP
contracts with Fannie Mae and Freddie Mac see footnote 78, supra.
\130\ Treasury indicated that Fannie Mae also engages numerous
marketing, site hosting, and IT vendors that are not individually
reported on due to the quantity of these contractors, their low average
dollar-value, and the associated costs of these contracts. OFS pays a
fixed fee to Fannie Mae pursuant to its financial agency agreement with
them, which is approximately $700,000 for marketing costs and 44
percent of the $8-$10 million of estimated costs for other services,
including site hosting and IT vendors. Treasury conversations with
Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
Other financial agents have made significant amounts of
money not from fees paid by Treasury, but from commissions. For
example, as a requirement of EESA, Treasury was given warrants
for common stock of the financial institutions it made
investments in through the CPP.\131\ Treasury has disposed of
these warrants by either selling them back to the issuing
institution or through a ``Dutch Auction,'' a form of public
offering that is registered with the Securities and Exchange
Commission (SEC).\132\ Deutsche Bank Securities Inc. (Deutsche
Bank) was retained as a subcontractor to act as the primary
financial agent executing these sales. In this role, Deutsche
Bank has earned from 1 percent to 5 percent of the gross
proceeds from the sale of these securities.\133\ For example,
Deutsche Bank acted as the sole book-running manager for the
sale of the Bank of America warrants Treasury received for its
assistance to that company. Deutsche Bank earned 1.5 percent,
or $23.5 million, of the gross proceeds from this sale.\134\ To
date, the TARP has paid $110 million in underwriting fees in
order to sell warrants publicly that have produced $5 billion
in gross proceeds.\135\
---------------------------------------------------------------------------
\131\ If the CPP recipient is a private institution, Treasury
received and immediately exercised warrants to purchase additional
shares of preferred stock since warrants for common stock shares were
not available. U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for Period Ending Sept. 16, 2010, at 17
(Sept. 20, 2010) (online at financialstability.gov/docs/transaction-
reports/9-20-10 Transactions Report as of 9-16-10.pdf) (hereinafter
``Treasury Transactions Report'').
\132\ U.S. Department of the Treasury, Treasury Announces Intent to
Sell Warrant Positions in Dutch Auctions (Nov. 19, 2009) (online at
www.financialstability.gov/latest/tg_11192009b.html) (``These offerings
will be executed using a modified Dutch auction methodology that
establishes a market price by allowing investors to submit bids at
specified increments above a minimum price specified for each
auction.'').
\133\ Data provided by Dealogic. In comparison, Zions Bancorp, a
TARP participant, sold two sets of non-TARP warrants publicly. The
first sale, completed May 19, 2010, was valued at $185 million and the
gross underwriting fee was three percent. The second sale was completed
September 22, 2010 and raised $36.8 million with a gross underwriting
fee of four percent.
\134\ Treasury sold three different sets of Bank of America
warrants: The first investment, associated with the original assistance
through the CPP, grossed $186,342,969 in proceeds. The second sale
associated with the CPP--the investment originally made in Merrill
Lynch--grossed $124,228,646 in proceeds. Finally, the Treasury made
gross proceeds of $1,255,639,099 from the Bank of America warrants it
received in conjunction with its Targeted Investment Program. In
aggregate, this represents $1,566,210,714 in gross proceeds. Following
the pricing of these securities, Treasury announced that the
``aggregate net proceeds to Treasury from the offerings are expected to
be approximately $1,542,717,552.79.'' Treasury Transactions Report,
supra note 131, at 17; U.S. Department of the Treasury, Treasury
Department Announces Pricing of Public Offerings of Warrants to
Purchase Common Stock of Bank of America Corporation (Mar. 1, 2010)
(online at www.financialstability.gov/latest/pr_03042010.html).
\135\ Data provided by Dealogic. Deutsche Bank employs other
financial services firms as ``co-managers'' for these offerings and
therefore does not retain the entirety of its percentage on each deal.
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E. Evaluation of Treasury's Contracting and Agreement Procedures and
Process
As discussed above, the use of private contractors and
financial agents to fill short- and long-term needs has been a
key factor in Treasury's ongoing efforts to help implement,
operate, and administer the TARP. In this section of the
report, the Panel evaluates the process underlying Treasury's
contracting and agreement procedures. In order to assess
whether Treasury could or should have done anything
differently, the Panel analyzes whether Treasury's stated
procedures comply with both the legal regime under which it
operates and with its internal controls, and evaluates
Treasury's monitoring and supervision of contract and financial
agent compliance and performance.
1. Compliance with Legal Obligations
a. Contracting and the FAR
Treasury's use of procurement contracts is governed by the
FAR.\136\ EESA permitted the Secretary, upon a finding of
``urgent and compelling circumstances,'' to waive any provision
of the FAR.\137\ Treasury, however, has not exercised this
power.\138\ The Panel commends this decision as an important
commitment to following contracting best practices.
---------------------------------------------------------------------------
\136\ For a more complete description of the FAR requirements, see
Section B.2, supra.
\137\ 12 U.S.C. Sec. 5217(a).
\138\ Treasury conversations with Panel staff (Aug. 30, 2010).
---------------------------------------------------------------------------
According to the GAO, Treasury has complied with FAR
requirements in its selection of contractors.\139\ To date,
companies that bid for but did not win contracts have not filed
any protests with either GAO or the Court of Federal Claims
alleging that Treasury used improper procedures in selecting
the winning company.\140\ Indeed, at times Treasury has done
more than it was required to do. For example, the FAR allows
for contracts to be awarded with less than full and open
competition in certain circumstances, such as when there are
circumstances of unusual and compelling urgency.\141\ In
several instances, Treasury determined that there were urgent
and compelling circumstances but nevertheless solicited and
received competitive bids.\142\
---------------------------------------------------------------------------
\139\ Government Accountability Office conversations with Panel
staff (Aug. 26, 2010).
\140\ Treasury conversations with Panel staff (Oct. 5, 2010).
\141\ Federal Acquisition Regulation, supra note 11, at Subpart
6.302-2(a)(2); Government Accountability Office conversations with
Panel staff (Aug. 26, 2010). See also Section I, infra.
\142\ Government Accountability Office conversations with Panel
staff (Aug. 26, 2010).
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b. Financial Agency Agreements
The exact contours of Treasury's legal authority to use
financial agency agreements are not clear after the enactment
of EESA. Only financial institutions can be financial
agents,\143\ but the FAR does not apply to financial agency
agreements, and although financial agents are bound by the
duties imposed by agency law, this does not restrict Treasury's
discretion in selecting financial agents or administering
financial agency agreements.
---------------------------------------------------------------------------
\143\ 12 U.S.C. Sec. 5211(c)(3). Financial institutions are defined
as ``any institution, including, but not limited to, any bank, savings
association, credit union, security broker or dealer, or insurance
company, established and regulated under the laws of the United States
or any State, territory, or possession of the United States, the
District of Columbia, Commonwealth of Puerto Rico, Commonwealth of
Northern Mariana Islands, Guam, American Samoa, or the United States
Virgin Islands, and having significant operations in the United States,
but excluding any central bank of, or institution owned by, a foreign
government.'' 12 U.S.C. Sec. 5202(5).
---------------------------------------------------------------------------
Treasury has had the authority to designate financial
agents since the National Bank Acts of 1863 and 1864, and case
law prior to EESA suggests that financial agents must be used
only to perform inherently governmental functions and that
financial agents must be paid from non-appropriated funds.\144\
EESA, though, arguably has broadened Treasury's financial agent
authority to displace the case law restrictions. EESA mandates
that financial agents may perform ``all such reasonable duties
related to this Act . . . as may be required.'' \145\ Though
still untested in court, such broad language can be read to
give Treasury statutory authority to employ financial agents
for a much wider spectrum of duties than just inherently
governmental functions.
---------------------------------------------------------------------------
\144\ Transactive Corp. v. United States, 91 F.3d 232 (D.C. Cir.
1996); Marketing & Management Information, Inc. v. United States, 57
Fed. Cl. 665 (Fed. Cl. 2003).
\145\ 12 U.S.C. Sec. 5211(c)(3).
---------------------------------------------------------------------------
In exercising the financial agency agreement authority,
Treasury has not made any in-depth analysis of this legal
ambiguity public. As discussed above, in Section C, Treasury's
primary consideration in deciding when to execute a financial
agency agreement was whether Treasury needed a close, fiduciary
relationship with the company providing the service. According
to officials in OFS's Office of Financial Agents (OFA), which
is responsible for selecting, administering, managing day-to-
day, and overseeing financial agency agreements, the OFA did
not consider whether a service was inherently governmental or
not. OFA officials stated that they had never taken the
discussion that far.\146\
---------------------------------------------------------------------------
\146\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
Despite not having published a legal justification for its
use of financial agency agreement authority, Treasury's
practice in awarding financial agency agreements relies on an
interpretation of EESA as having displaced prior case law.
First, all the financial agents were paid from appropriated
funds. Second, at least some of the financial agency agreements
were for functions that were not inherently governmental, such
as those for whole loan or securities management. Historically,
these services have been obtained through procurement
contracts, which cannot be used for inherently governmental
functions.\147\
---------------------------------------------------------------------------
\147\ James J. McCullough & William S. Speros, These Agents Act for
the Treasury Department, Legal Times (Nov. 10, 2008) (online at
www.ffhsj.com/siteFiles/Publications/
C770B7734821251EE89B86279A25212E.pdf).
---------------------------------------------------------------------------
If this broad reading of EESA is accepted, Treasury has
likely fulfilled its legal obligations. Nevertheless,
Treasury's departure from prior limits on financial agency
agreement authority, and the fact that a broad reading of EESA
has not yet been tested in court, means that Treasury's use of
its financial agency agreement authority may be open to debate.
It is important to note, however, that this does not imply
that Treasury has misused its broad financial agency agreement
powers. Under a broad reading of EESA, Treasury had
unprecedented, unfettered authority to make financial agency
agreements. Though the Panel does question specific decisions
elsewhere in this report, \148\ the Panel has no reason to
believe that Treasury abused its discretion, despite the real
possibility afforded by such unconstrained authority. Indeed,
at times Treasury has voluntarily gone beyond what was
required, without any legal obligation. For example, when
selecting a financial agent to be a custodian, Treasury had no
legal obligation to bid the agreement competitively.
Nevertheless, Treasury publicly sought bids for the financial
agency agreement and received 70. Of these 70, 10 met minimum
eligibility requirements, and three institutions were asked to
give presentations to Treasury before The Bank of New York
Mellon was ultimately selected as the financial agent.\149\
---------------------------------------------------------------------------
\148\ See Sections G, H, and Annex I, infra.
\149\ U.S. Government Accountability Office, Troubled Asset Relief
Program: Additional Actions Needed to Better Ensure Integrity,
Accountability, and Transparency, at 37 (Dec. 2, 2008) (GAO-09-161)
(online at www.gao.gov/new.items/d09161.pdf) (hereinafter ``December
2008 GAO Report'').
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2. Compliance with Treasury's Internal Controls
EESA requires Treasury to establish and maintain an
effective system of internal controls consistent with the
standards prescribed under Section 3512(c) of Title 31, U.S.
Code, to provide reasonable assurance of ``the effectiveness
and efficiency of operations, including the use of the
resources of the TARP,'' ``the reliability of financial
reporting, including financial statements and other reports for
internal and external use,'' and ``compliance with applicable
laws and regulations.'' \150\ Internal controls include the
policies, procedures, and guidance that help management ensure
effective and efficient use of resources; compliance with laws
and regulations; and prevention and detection of fraud, waste,
and abuse. Effective internal controls are a fundamental part
of managing any organization to achieve desired outcomes and
manage risk.
---------------------------------------------------------------------------
\150\ 12 U.S.C Sec. 5226(c)(1)(A)-(C).
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As the GAO has noted, a key challenge that OFS faced
following the enactment of EESA was the need to develop
simultaneously a comprehensive system of internal controls
while it was trying to react quickly to financial market
dislocations.\151\ Due to the rapid evolution of the TARP, OFS
developed controls as various aspects of the program became
operational, instead of implementing a controls system prior to
the establishment of different programs. For example, as
discussed above, \152\ Treasury developed ``Policies and
Procedures'' to govern its financial agency agreements. These
controls, however, were written in late 2009 and early 2010,
and received final approval only at various points in 2010--
serving as a further indication that Treasury's system of
internal controls has been a process of gradual development,
implementation, and evolution. Furthermore, OFS has yet to
develop internal written procedures for overseeing and
monitoring Fannie Mae's and Freddie Mac's administrative and
compliance activities, including verifying the completeness and
accuracy of their data.\153\ While the Panel recognizes the
rapid pace of Treasury's program implementation and the
evolving nature of the TARP, the lack of a comprehensive system
of internal controls at the beginning increased the risk that
the interests of the government and taxpayers may not have been
adequately protected and that the program objectives may not
have been achieved in the most efficient and effective manner.
---------------------------------------------------------------------------
\151\ December 2008 GAO Report, supra note 149, at 43.
\152\ See Section B.4, supra.
\153\ For further discussion of Fannie Mae and Freddie Mac, see
Annex I, infra.
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Moreover, for financial agency agreements, the now-
finalized guidance is either procedural or general, not
substantive. For example, the oversight policy document
mandates only that Treasury must ``ensure that service levels
are being met.'' \154\ Such requirements are so amorphous that
it is impossible to meaningfully evaluate whether or not
Treasury complied. Alternatively, the guidance is logistical,
as when the compensation procedures direct that obligating
funds requires the ``completion of a Funding Authorization for
Financial Agent Activity Sheet, submission of a purchase
request, commitment of funds, and the creation of an
obligation.'' \155\ The Policies and Procedures do not
constrain Treasury's discretion or provide practical guidance
to Treasury employees charged with selecting and administering
financial agency agreements. As a result, compliance with these
internal Policies and Procedures will have little practical
effect on Treasury's use of its financial agency agreement
authority.\156\
---------------------------------------------------------------------------
\154\ Treasury Financial Agent Oversight Policy, supra note 53, at
4.
\155\ U.S. Department of the Treasury, Financial Agent Compensation
Procedure, at 5 (June 30, 2010).
\156\ It is unfortunately impossible to determine whether such
guidance is typical of Treasury's usual practices with regard to
financial agents. Treasury currently has 26 financial agency agreements
that are unrelated to the TARP and are administered separately. There
is, however, little public information regarding the internal controls
Treasury has adopted to help administer these agreements, making a
comparison to TARP-related financial agency agreements impossible.
---------------------------------------------------------------------------
The internal controls for contracts are more extensive. The
internal controls cover six areas: web publication of
contracts, purchase request guidelines, contact and inquiries
procedures, COTR nomination and file organizations, contract
distribution procedure, and acquisition planning guidelines.
Though some of these policies are procedural, others contain
substantive requirements for each step of the contracting
process. Such clear directions ensure consistency in
administration and that adequate procedures are used for all
contracts.
3. Evaluation of How Treasury Selects Contractors and Agents
Once the decision to outsource a particular function has
been made, \157\ and companies have submitted bids, Treasury
still must determine which specific company will be awarded the
contract or agreement. For contracts, the FAR provides
straightforward requirements: agencies select the company whose
bid represents the best value.\158\ The FAR also lists a number
of factors and subfactors to use in evaluating bids.\159\
Financial agency agreements, by contrast, have far fewer formal
requirements, and therefore OFA has considerably more
discretion in selecting agents.
---------------------------------------------------------------------------
\157\ For a discussion of how Treasury decides what to outsource,
see Section C, supra.
\158\ Federal Acquisition Regulation, supra note 11, at Subpart
15.3.
\159\ Federal Acquisition Regulation, supra note 11, at Subpart
15.3.
---------------------------------------------------------------------------
OFA does limit its options by imposing certain threshold
requirements, discussed more fully above, in Section C.
Nevertheless, OFA's broad discretion resulted in decisions like
hiring Fannie Mae and Freddie Mac without apparently taking
into account either public or private sector alternatives,
which raised a number of issues that are addressed in detail
later in this report.\160\ Treasury selected Fannie Mae and
Freddie Mac based on three criteria: (1) Their nationwide
housing knowledge, as well as the resources and capabilities
they had acquired in the course of performing their unique role
in housing finance markets; (2) the limited time frame for
implementing HAMP; and (3) prior market research by Treasury
for a separate program that indicated Fannie Mae and Freddie
Mac were well qualified for the program.\161\ According to
Deputy Assistant Secretary Gary Grippo, ``we made a
determination that there were no other parties with the
capabilities and infrastructure to operate a national mortgage
modification program.'' \162\ Testimony from the Panel's recent
hearing, however, suggests that the roles of Fannie Mae and
Freddie Mac as financial agents were not simply an extension of
what they were already doing. In addition, both Fannie Mae and
Freddie Mac have relied heavily on subcontractors to implement
HAMP, calling into question whether they had the operating
capabilities and infrastructure to operate a national
foreclosure mitigation program.\163\
---------------------------------------------------------------------------
\160\ For a more complete discussion of the Fannie Mae and Freddie
Mac financial agency agreements, see Annex I, infra.
\161\ Treasury conversations with Panel staff (Sept. 27, 2010).
\162\ Testimony of Gary Grippo, supra note 49.
\163\ For a more complete discussion of the Fannie Mae and Freddie
Mac financial agency agreements, see Annex I.
---------------------------------------------------------------------------
4. Evaluation of Treasury's Post-Award Management of Contracts and
Agreements
a. Who Manages Post-Award Contracts and Agreements?
Treasury has improved its post-award contract and agreement
management staff over time. Given the rapid deployment of the
TARP in response to the financial crisis and the need to begin
operations immediately, management staffing was initially
inadequate. In late 2008 and early 2009, GAO developed a number
of recommendations designed to ensure the integrity,
transparency, and accountability of Treasury's TARP contracting
process.\164\ In general, GAO recommended that Treasury
expedite its efforts to ensure that a sufficient number of
appropriately trained personnel were in place to oversee the
performance of all contractors. Since then, Treasury has
dedicated more personnel to help facilitate effective
management and oversight of TARP contracts and financial agency
agreements.\165\
---------------------------------------------------------------------------
\164\ U.S. Government Accountability Office, Troubled Asset Relief
Program: Status of Efforts to Address Transparency and Accountability
Issues, at 76-77 (Jan. 30, 2009) (GAO-09-296) (online at www.gao.gov/
new.items/d09296.pdf) (hereinafter ``January 2009 GAO Report on
Transparency and Accountability''); December 2008 GAO Report, supra
note 149, at 59-60.
\165\ Treasury conversations with Panel staff (Sept. 2, 2010).
---------------------------------------------------------------------------
i. Procurement Contracts
Procurement contracts are overseen by contracting officers,
who have overall responsibility for managing a contract. The
day-to-day monitoring of a contract is delegated to Contracting
Officer's Technical Representatives (COTRs), who act as the
contracting officer's technical experts and representatives in
the administration and monitoring of all TARP contracts. With
limited exceptions, COTRs are required by Treasury's internal
guidance to be trained and certified in their acquisition-
related responsibilities prior to their appointments.\166\
---------------------------------------------------------------------------
\166\ January 2009 GAO Report on Transparency and Accountability,
supra note 164, at 51-52.
---------------------------------------------------------------------------
Initially, Treasury did not have enough trained COTRs to
manage the contracts, so it assigned a number of its senior
officials as COTRs. Given the limited timeframe for executing
the program, some of these officials were assigned COTR
responsibilities without receiving formal training in their
acquisition-related responsibilities.\167\ While Treasury
replaced the senior-level COTRs with certified COTRs over time,
the fact that officials without proper procurement training
were charged with the administration and monitoring of
contracts for a time potentially impeded efforts to implement
effectively and oversee the TARP.
---------------------------------------------------------------------------
\167\ January 2009 GAO Report on Transparency and Accountability,
supra note 164, at 51-52.
---------------------------------------------------------------------------
Since then, trained and certified COTRs have been put in
place for all OFS contracts, \168\ and Treasury has held a
number of internal workshops and best practice exchanges for
COTRs. Personnel from other agencies have been brought in to
share different agencies' practices.\169\ Treasury also plans
to hold annual refresher training programs intended to
supplement the formal training and certification required prior
to COTR appointment and further enhance skills development for
COTRs assigned to TARP contracts and financial agency
agreements.\170\ In addition, OFS has developed an online COTR
document management structure for contract and agreement
administration to ensure consistent and complete documentation
of COTR files, standardize processes, and facilitate personnel
transition through access to information and shared
practices.\171\ In areas where COTR oversight may potentially
be weak, Treasury has gone further. For example, Treasury noted
that COTRs might be unable to assess compliance effectively in
the context of legal services. To mitigate this potential
problem, Treasury had all of the attorneys who worked with
retained law firms receive training and become COTR-
certified.\172\
---------------------------------------------------------------------------
\168\ There are currently 21 COTRs overseeing Treasury's contracts.
\169\ Treasury conversations with Panel staff (Sept. 16, 2010).
\170\ Treasury conversations with Panel staff (Sept. 2, 2010); U.S.
Department of the Treasury, OFS Actions During Fiscal Year 2010 to
Enhance Oversight of TARP Contractor and Financial Agent Performance
(Aug. 19, 2010) (hereinafter ``OFS Actions to Enhance Oversight'').
Treasury has also indicated that it has trained additional personnel
for COTR certification to ensure workloads are balanced so sufficient
attention is given to managing contracts and financial agency
agreements.
\171\ Id.
\172\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
Additionally, Treasury has hired two senior-level contract
specialists to both supervise and support all pre-award and
post-award procurement actions in support of OFS.
ii. Financial Agency Agreements
OFA is responsible for the administration, day-to-day
management, and oversight of the financial agency agreements
supporting the implementation of EESA. OFA assists the Treasury
Fiscal Assistant Secretary and Deputy Fiscal Assistant
Secretary in the selection, designation, and management of
financial agents in support of the TARP. OFA is responsible for
providing financial agents with proper instructions and with
formal direction and guidance in executing their
responsibilities under their financial agency agreements.
Within OFA, financial agent managers are the primary points of
contact for specific financial agency agreements; their
responsibilities include ensuring that funds are obligated to
financial agency agreements and that invoices and accruals are
processed in a timely fashion. In addition, with respect to
Freddie Mac's financial agent functions, senior-level officials
within OFS direct and closely monitor Freddie Mac's activities,
and OFS has four employees assigned to work full-time to
oversee Freddie Mac (three of whom work full time on-site in
Freddie Mac's office).\173\ Additionally, Treasury's MHA
Compliance Committee (composed of senior Treasury officials
leading the MHA program and chaired by the director of
compliance at OFS) meets weekly with Freddie Mac's MHA
compliance senior management team to discuss the program's
status, issues, and challenges.\174\
---------------------------------------------------------------------------
\173\ Treasury conversations with Panel staff (Sept. 23, 2010);
Congressional Oversight Panel, Written Testimony of Paul Heran, program
executive, Making Home Affordable--Compliance, Freddie Mac, COP Hearing
on Treasury's Use of Private Contractors, at 2 (Sept. 22, 2010) (online
at cop.senate.gov/documents/testimony-092210-heran.pdf) (hereinafter
``Testimony of Paul Heran'').
\174\ Id. at 2; Treasury conversations with Panel staff (Sept. 23,
2010).
---------------------------------------------------------------------------
Since September 2009, Treasury has also made organizational
and staffing improvements to strengthen its oversight of
financial agents, including the hiring of seven full-time staff
members. Originally anticipated to have only around five staff
members, OFA currently has 11 staff, with four more expected to
be hired by the end of 2010. The improvements at OFA also
include the hiring of a permanent full-time director who has 10
years of experience in managing billion-dollar federal
contracts and Treasury operations supported by financial agents
as well as the reorganization of OFA into dedicated teams
charged with the monitoring and oversight of each major
financial agent.\175\
---------------------------------------------------------------------------
\175\ U.S. Department of the Treasury, Update on Changes in Key
Positions for TARP Oversight of Contractors and Financial Agents (Sept.
14, 2010).
---------------------------------------------------------------------------
iii. Additional Post-Award Management
OFS has created the Contracting Agreement and Review Board
(CARB), which meets at least monthly and is charged with
administering contracts and financial agency agreements,
ensuring sufficient and effective planning, administration, and
management, and examining issues with planned TARP
acquisitions.\176\
---------------------------------------------------------------------------
\176\ Treasury conversations with Panel staff (Sept. 2, 2010).
---------------------------------------------------------------------------
In addition, Treasury hired an executive contract
administration manager to oversee the planning of long-range
requirements, implement contract management best practices, and
provide leadership and guidance to COTRs and OFA management
personnel. The contract administration manager reports to the
OFS chief operating officer and holds weekly roundtable
meetings with COTRs to identify significant issues and actions
on particular contracts and financial agency agreements,
facilitate cross-training and professional development of
COTRs, and continuously improve the administration and
oversight of OFS contracts and agreements.\177\
---------------------------------------------------------------------------
\177\ Treasury conversations with Panel staff (Sept. 2, 2010).
---------------------------------------------------------------------------
OFS has also established OFS-Compliance (OFS-C) to perform
some compliance monitoring. OFS-C currently has 27 employees
and plans to add 20 more positions. Of these 27, five are
tasked with reviewing all of Treasury's arrangements for
conflicts of interest.\178\ Four employees help monitor the
financial agency agreements with Fannie Mae and Freddie Mac,
which is discussed in more detail below, in Annex I. Other
staff are not specifically assigned to monitor performance but
do so part-time in the course of reviewing TARP programs such
as the CPP.
---------------------------------------------------------------------------
\178\ For more discussion of this conflicts of interest group, see
Section H, infra.
---------------------------------------------------------------------------
b. Treasury Procedures for Post-Award Contract and
Agreement Management
i. Procurement Contracts
The specific procedures and metrics Treasury uses to
administer a contract are laid out in each contract on a
contract-by-contract basis. In general, though, Treasury has
several layers of controls to manage contractor performance.
The first layer is the COTR, who monitors contract performance
on a daily or weekly basis. The COTR also prepares a monthly
report, which evaluates the contractor for cost control,
performance, and business relations.\179\ For contracts for
legal services, the attorneys who work with the contractor law
firm help the COTR prepare these monthly reports. At present,
Treasury's contracts are overseen by 21 COTRs, with a COTR
overseeing, at most, $38 million worth of contracts and usually
much less.
---------------------------------------------------------------------------
\179\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
The next layer of controls is the CARB, which reviews the
COTRs' monthly reports. The CARB monitors performance data from
all contracts to ensure consistent and effective performance
management. Treasury also relies on self-certifications from
contractors. For example, contractors must certify that they
have accurately reported all conflicts of interest.
Ongoing efforts on the part of Treasury to enhance its
oversight of contractor performance include an OFS Contract
Administration Management Plan, which is a comprehensive
strategy to improve acquisition planning, implement consistent
and reliable processes for contract execution and
implementation, manage contractor performance based on level of
risk, and reduce reliance on contracted support as OFS retains
in-house expertise.\180\
---------------------------------------------------------------------------
\180\ OFS Actions to Enhance Oversight, supra note 170.
---------------------------------------------------------------------------
In the event that a contract violation is found, the COTR
has several options, including rejecting or withholding
payment, stopping or reducing the amount of work the contractor
receives, considering the performance as an element of future
award decisions, and issuing a formal notice to the contractor
to cure.
These procedures follow well-established norms for
monitoring contract performance.\181\ Though additional
procedures such as requiring independent audits of contractors
would provide added assurances of contract performance, it is
not clear they would be worth the added administrative time and
expense.\182\
---------------------------------------------------------------------------
\181\ Project on Government Oversight conversations with Panel
staff (Sept. 27, 2010); Christopher Yukins, Professor of Law, George
Washington University Law School, conversations with Panel staff (Sept.
29, 2010).
\182\ Christopher Yukins, Professor of Law, George Washington
University Law School, conversations with Panel staff (Sept. 29, 2010).
---------------------------------------------------------------------------
ii. Financial Agency Agreements
Since September 2009, Treasury has strengthened its
infrastructure for monitoring, managing, and overseeing its
financial agents, including the installation of performance
measurement and monitoring initiatives.
OFA's primary mechanism for monitoring compliance with the
terms of a financial agency agreement is agent self-
certification.\183\ The agent must certify that they are
complying with 10 to 15 selected terms of the agreement, such
as that all conflicts of interest have been addressed, and that
they safeguarded protected information.\184\ In addition,
agents are required to review the effectiveness of their
internal control processes annually, which most agents do
either by hiring an independent reviewer to perform an SAS 70
audit, \185\ or by conducting a comparable internal audit.\186\
Treasury also requires agents to submit information regarding
conflicts of interest, which it reviews on an ongoing
basis.\187\
---------------------------------------------------------------------------
\183\ Treasury conversations with Panel staff (Sept. 16, 2010).
\184\ See, e.g., U.S. Department of the Treasury, Financial Agency
Agreement Between U.S. Department of the Treasury and Avondale
Investments (Dec. 22, 2009) (Contract No. TOFS-10-FAA-001) (online at
www.financialstability.gov/docs/ContractsAgreements/
Avondale%20Signed%20FAA.pdf); Financial Agency Agreement Between
Treasury and BNY Mellon, supra note 27.
\185\ An SAS 70 audit is an in-depth review of a company's control
objectives and control activities performed by an independent
accounting and auditing firm. It was developed by the American
Institute of Certified Public Accountants and is a widely recognized
auditing standard. For more information on the auditing standard, see
SAS 70 Audit, SAS 70--Overview (online at sas70.com/
sas70_overview.html).
\186\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 6.
\187\ Treasury conversations with Panel staff (Sept. 16, 2010). For
a more complete discussion of Treasury's monitoring of contractor and
agent conflicts of interest, see Section H, infra.
---------------------------------------------------------------------------
OFA has instituted an annual on-site spot check program for
financial agents. These spot checks are not formal audits, but
instead select a few provisions in the agency agreements and
test the agent's processes with regard to those provisions. For
example, a spot check may verify that the agent has sufficient
measures in place for protecting confidential information,
including that all employees have signed non-disclosure
forms.\188\
---------------------------------------------------------------------------
\188\ Treasury conversations with Panel staff (Sept. 16, 2010);
Prepared Statement of Gary Grippo and Ronald Backes, supra note 26, at
6.
---------------------------------------------------------------------------
In addition to compliance with the terms of the financial
agency agreement, OFA also evaluates agents on their
performance under the financial agency agreement on a monthly
or quarterly basis. The process involves all OFS stakeholders
and balances both quantitative and qualitative factors.
Quantitative measures include counts of work product, for
example. Qualitative assessments principally consist of
interviews with the relevant program officers.\189\ Survey
responses are also used.\190\ Together, these quantitative and
qualitative assessments are used to create a scorecard, which
is linked to incentive fees in some cases.\191\
---------------------------------------------------------------------------
\189\ Treasury conversations with Panel staff (Sept. 16, 2010).
\190\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 6.
\191\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 6.
---------------------------------------------------------------------------
Furthermore, Treasury has instituted a bi-annual customer
satisfaction survey of OFA's internal stakeholders (for
example, OFS), which provides a subjective evaluation of
whether the financial agents are responsive to Treasury
requirements.\192\
---------------------------------------------------------------------------
\192\ U.S. Department of the Treasury, Update on Changes in OFS
Actions for Enhancing Contractor and Financial Agent Oversight (Sept.
14, 2010).
---------------------------------------------------------------------------
If an agent does not perform, OFA relies on general
Treasury procedures to respond. Treasury has a three-strike
policy. On the first instance of non-performance, Treasury will
meet the agent, present proof of non-performance, and establish
a remediation plan, which will be monitored weekly. If the
agent fails to perform again, Treasury will issue a formal
letter and possibly issue sanctions. A third incident usually
results in termination of the agreement. To date, OFA has not
proceeded to this third step against any agent.\193\
---------------------------------------------------------------------------
\193\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
Despite these several layers of controls, OFA's procedure
has failed to detect at least one serious failing by an agent.
Discussed in more detail below, in Annex I, Fannie Mae
published incorrect information regarding mortgage borrower re-
default rates under HAMP. The error was detected not by
Treasury but by a group of outside analysts.\194\ OFS and OFA
officials readily admit that Treasury lacked adequate controls
with respect to the communication of program requirements and
the validation of data.\195\ This admission calls into question
the level of independent scrutiny, verification, and oversight
that Treasury has implemented with respect to the monitoring of
its financial agents.\196\ While the Panel recognizes and
appreciates that Treasury's monitoring and oversight have
strengthened over time, proper implementation of the TARP and
oversight of financial agents require rigorous monitoring and
controls from program inception.
---------------------------------------------------------------------------
\194\ MITRE, Assessment of the Home Affordable Modification Program
(HAMP) Re-Default Table, Conducted for the U.S. Department of the
Treasury--Office of Financial Stability, at 2-1 (Aug. 9, 2010) (online
at www.financialstability.gov/docs/
MITRE%20Final%20Public%20Version%208-6-10.pdf) (hereinafter ``MITRE
HAMP Re-Default Report'').
\195\ Treasury conversations with Panel staff (Sept. 23, 2010).
\196\ This concern is exacerbated by Treasury's exclusive reliance
on Fannie Mae to act as record keeper and program administrator, which
creates significant risks to both effective program implementation and
financial agent oversight. For further discussion, see Annex I, infra.
---------------------------------------------------------------------------
Some have argued that the best method for ensuring agent
performance is to create monetary incentives in the agreement
to reward excellent performance. Such incentives also provide
clear metrics for judging success and would force Treasury to
define its goals for each contract before it is awarded. This
technique has been used in some agreements such as those with
Fannie Mae and Freddie Mac.\197\ On the other hand, others
argue that such incentives are not always necessary. Agents may
be motivated to perform well by, for example, a desire to build
capacity in a particular area or the prestige associated with
successfully accomplishing the task.
---------------------------------------------------------------------------
\197\ For a more complete discussion of incentives in these
agreements, see footnote 122, supra.
---------------------------------------------------------------------------
iii. Subcontracts
Although Treasury's consent is required before any
contractor or financial agent can engage a subcontractor,
Treasury has limited oversight ability after the subcontract is
awarded. Before giving consent, OFA examines potential
financial agent subcontractors to ensure that there is an
adequate budget and that the tasks envisioned for the
subcontractor are within the original scope of work. In
addition, the relevant program office can become involved to
ensure that program objectives will be met. Contracts are most
carefully examined when they involve payment arrangements where
Treasury may bear the risk of cost overruns.\198\
---------------------------------------------------------------------------
\198\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
Prior to giving approval, Treasury also examines all
subcontracts for conflict of interest information. The prime
contractor or financial agent is responsible for collecting
conflicts information from the potential subcontractors and
submitting it to Treasury. Potential subcontractors have been
rejected because of conflicts of interest issues.\199\
---------------------------------------------------------------------------
\199\ Treasury conversations with Panel staff (Sept. 16, 2010).
---------------------------------------------------------------------------
After approving a subcontract, Treasury primarily relies on
the prime contractor or the financial agent to ensure their
subcontractors' compliance. Prime contractors and financial
agents, in their required self-certifications, also certify to
the compliance of their subcontractors. Prime contractors and
financial agents collect ongoing conflicts of interest
information from their subcontractors, and then send this
information to Treasury. Treasury, however, does directly
collect some information on subcontractors through day-to-day
inquiries, annual reports from prime contractors and financial
agents, and from monthly reports that identify subcontractors,
subcontract values, and other information.
Even without direct oversight, Treasury retains tools to
control subcontractor behavior by working through prime
contractors and financial agents. All the terms of the original
contract or financial agency agreement flow down to, and bind,
the subcontractors. Prime contractors and financial agents also
remain directly liable to Treasury in the event that a
subcontractor fails to perform adequately.\200\ In addition,
continually adding further layers of direct oversight risks
adding to administrative costs without correspondingly great
increases in accountability.\201\
---------------------------------------------------------------------------
\200\ Treasury conversations with Panel staff (Sept. 16, 2010).
\201\ Professor Lawrence Lessig, a Professor of Law at Harvard Law
School and Director of the Edmond J. Safra Foundation Center for
Ethics, described this problem as the ``Bee Watcher-Watcher'' problem,
referencing the Dr. Seuss story that features a bee being watched by a
watcher, who is in turn watched by another watcher (a watch-watcher),
who is in turn watched by another watcher (a watch-watcher-watcher) in
an ever-expanding chain of oversight. Dr. Seuss, Did I Ever Tell You
How Lucky You Are?, at 29 (1973); Lawrence Lessig, Professor of Law,
Harvard Law School, conversations with Panel staff (Sep. 20, 2010).
---------------------------------------------------------------------------
Despite these controls, however, Treasury lacks critical
basic information about subcontractors, such as the text of the
subcontracts themselves \202\ and the dates on which they were
awarded.\203\ Treasury should collect this information. In
addition, though prime contractor and financial agent direct
liability will provide incentive to ensure subcontractors are
adequate, it does not necessarily ensure that Treasury receives
the best value. More troublingly, without direct oversight,
Treasury will have difficulty detecting violations of contract
terms that are not related to work product, such as whether or
not a subcontractor has ensured the confidentiality of
information or that there are no conflicts of interest. At
present, Treasury must simply trust that prime contractors or
financial agents will enforce these provisions.\204\
---------------------------------------------------------------------------
\202\ Treasury conversations with Panel staff (Sept. 13, 2010).
\203\ Treasury conversations with Panel staff (Sept. 16, 2010).
\204\ This lack of direct oversight and its associated dangers are
not unique to Treasury. Treasury's procedure for managing
subcontractors is typical of most government agencies. Steven Schooner,
Professor of Law, George Washington University Law School,
conversations with Panel staff (Oct. 5, 2010); Project on Government
Oversight conversations with Panel staff (Oct. 6, 2010). Over the past
twenty years, the government's contract management staff has been cut
while the total value of its acquisitions has increased. This has left
the government with insufficient resources for contract management and
has eviscerated the resources available for overseeing subcontractors.
Steven Schooner, Professor of Law, George Washington University Law
School, conversations with Panel staff (Oct. 5, 2010).
---------------------------------------------------------------------------
F. Evaluation of Small Business Arrangements
Under the FAR, any acquisition between $3,000 and $100,000
must be set aside exclusively for small business concerns,
unless the contracting officer determines that competitive
offers from small businesses cannot be obtained.\205\ For all
other contracts, the FAR expresses a preference for contracting
with small businesses, but does not require it. No requirements
at all exist for small business financial agency
agreements.\206\
---------------------------------------------------------------------------
\205\ Federal Acquisition Regulation, supra note 11, at Subpart
9.5.
\206\ December 2008 GAO Report, supra note 149, at 39.
---------------------------------------------------------------------------
From the beginning of the TARP, however, OFS has encouraged
small businesses, including minority-, veteran-, and women-
owned small businesses, to pursue procurement opportunities
under both its contracting authority and for financial agency
agreements.\207\ Where subcontracting opportunities exist for a
given work requirement, OFS requires contractors to submit
small business subcontracting plans.\208\ OFS considers a
potential contractor's efforts to use small businesses as part
of its selection criteria for all contracts.\209\ Each contract
is reviewed internally by a small business specialist to
examine opportunities for small business participation.\210\ In
addition, the financial agency agreements for both Fannie Mae
and Freddie Mac provide a floor for the government-sponsored
enterprises' (GSEs') use of small business contractors,
including minority- or women-owned contractors. In entering
into their financial agency agreements with Treasury, Fannie
Mae and Freddie Mac agreed to ``engage one or more small
businesses as contractors, including minority- or women-owned
businesses,'' in fulfilling their responsibilities.\211\ OFS
has also reached out to small businesses, including minority-,
veteran-, and women-owned small businesses. For example, on May
27, 2009, Treasury held an Industry Day and Small Business
Networking event where 11 small businesses presented their
capabilities to an audience of approximately 40 interested
firms.\212\ In some cases, OFS has called small business trade
associations to notify them of a new solicitation available to
small businesses.\213\ These efforts notwithstanding, Treasury
has received considerable criticism of its efforts to promote
small business contracting. A recurring critique is that
Treasury's solicitations are too large, covering too much work
or too large a geographic area. Instead of awarding one large
contract that small businesses cannot feasibly perform, these
organizations argue, Treasury should break down the work into
multiple smaller contracts.\214\ Other criticisms include that
Treasury's outreach efforts have not included small
professional services firms such as law firms, \215\ and that
Treasury has not provided sufficient, conveniently located
training sessions on how to win contracts.\216\
---------------------------------------------------------------------------
\207\ U.S. Government Accountability Office, Troubled Asset Relief
Program: One Year Later, Actions Are Needed to Address Remaining
Transparency and Accountability Challenges, at 28 (Oct. 2009) (GAO-10-
16) (online at www.gao.gov/new.items/d1016.pdf) (hereinafter ``October
2009 GAO Report on Transparency and Accountability''). One of
Treasury's objectives is to provide contracting opportunities for small
businesses. See Treasury Procurement Contracts and Agreements, supra
note 10 (``Treasury actively encourages the participation of small,
minority, veteran, and women-owned businesses in fulfilling its needs.
. . . Where subcontracting opportunities exist for a given work
requirement Treasury requires contractors to submit small business
subcontracting plans with specific goals for small, minority, veteran,
and women-owned business subcontracts.'').
\208\ Treasury Procurement Contracts and Agreements, supra note 10.
\209\ Treasury conversations with Panel staff (Sept. 16, 2010).
\210\ Treasury conversations with Panel staff (Sept. 16, 2010).
\211\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122. For a more complete discussion of Fannie Mae and
Freddie Mac, see Annex I, infra.
\212\ Treasury conversations with Panel staff (Sept. 16, 2010).
\213\ Treasury conversations with Panel staff (Sept. 16, 2010).
\214\ National Association of Minority and Women Owned Law Firms
conversations with Panel staff (Sept. 30, 2010); National Association
of Real Estate Brokers conversations with Panel staff (Oct. 5, 2010).
\215\ National Association of Minority and Women Owned Law Firms
conversations with Panel staff (Sept. 30, 2010).
\216\ National Association of Real Estate Brokers conversations
with Panel staff (Oct. 5, 2010).
---------------------------------------------------------------------------
OFS has not established any specific targets for how many
contracts, agreements, and subcontracts to award to small
businesses. Treasury in general, however, establishes, in
negotiation with the Small Business Administration, internal
goals for small business contracts. Their goals for
disadvantaged, women-owned, and veteran-owned small businesses
are subsets of their broader small business goals. Figure 7
below displays the goals for fiscal years 2010 and 2011.
FIGURE 7: TREASURY'S SMALL BUSINESS CONTRACTING GOALS, FISCAL YEARS 2010
and 2011 \217\
------------------------------------------------------------------------
Goal \218\
Category (Percent)
------------------------------------------------------------------------
Prime Contracts
Small Business............................................. 28.5
Small Disadvantaged Business........................... 5.0
Women-Owned Small Business............................. 5.0
Service-Disabled Veteran-Owned Small Business.......... 3.0
Subcontracts
Small Business............................................. 44.7
Small Disadvantaged Business........................... 5.0
Women-Owned Small Business............................. 5.0
Service-Disabled Veteran-Owned Small Business.......... 3.0
------------------------------------------------------------------------
\217\ Office of Small and Disadvantaged Business Utilization, Fiscal
Year 2010 & 2011 Small Business Program Goals (online at www.treas.gov/
offices/management/dcfo/osdbu/accomplishments.shtml) (accessed Oct.
12, 2010).
\218\ The goal is a percentage of contract dollars obligated, not the
number of contracts.
OFS initially did not contract with many small businesses,
but has substantially increased its share of small business
contracts over time.\219\ As of September 30, 2010, a majority
of financial agency agreements (eight of 15) and 13 contracts
have been awarded to small businesses. Small businesses have
won 55 subcontracts, although it is possible that Treasury's
lack of transparency regarding subcontractors has concealed
even greater opportunities for small businesses.\220\ These
contracts, subcontracts, and agreements have already expended
$42.3 million to small businesses and have an obligated value
of $54.3 million.
---------------------------------------------------------------------------
\219\ October 2009 GAO Report on Transparency and Accountability,
supra note 207, at 28-29.
\220\ The Panel compiled this number from data provided from
Treasury (Sept. 30, 2010).
FIGURE 8: TOTAL NUMBER OF CONTRACTS, SUBCONTRACTS, AND FINANCIAL AGENCY AGREEMENTS, AS OF AUGUST 13, 2010 \221\
----------------------------------------------------------------------------------------------------------------
Prime Financial Agency
Contracts Agreements Subcontracts
----------------------------------------------------------------------------------------------------------------
Large Business............................................ 60 7 43
Service Disabled Veteran Owned Small Business............. 2 0 2
Small Business............................................ 6 2 20
Small Disadvantaged Business \222\........................ 1 0 2
Women and Minority Owned Small Business................... 1 0 5
Woman Owned Small Disadvantaged Business.................. 1 0 1
Women Owned Small Business................................ 2 1 15
Minority Owned Small Business............................. 0 5 10
Other..................................................... 0 0 1
----------------------------------------------------------------------------------------------------------------
\221\ Data from Treasury (Sept. 30, 2010). Data for contractors to financial agents is as of August 31, 2010.
\222\ Despite the potential overlap, Treasury used both the Minority Owned Small Business and Small
Disadvantaged Business categories in the data provided to the Panel.
FIGURE 9: VALUE OF CONTRACTS, FINANCIAL AGENCY AGREEMENTS, AND SUBCONTRACTS, AS OF AUGUST 13, 2010 \223\
----------------------------------------------------------------------------------------------------------------
Prime Financial Agency
Contracts Agreements Subcontracts
----------------------------------------------------------------------------------------------------------------
Large Business............................................ $74,551,966 $180,380,453 $62,095,468
Service Disabled Veteran Owned Small Business............. 89,032 0 $187,843
Small Business............................................ \224\1,931,69 4,229,167 14,621,028
4
Small Disadvantaged Business.............................. 0 0 191,368
Women and Minority Owned Small Business................... 0 0 3,466,979
Woman Owned Small Disadvantaged Business.................. 0 0 422,499
Women Owned Small Business................................ 1,307,071 575,000 7,892,877
Minority Owned Small Business............................. 0 9,180,000 3,999,121
Other..................................................... 0 0 87,360
----------------------------------------------------------------------------------------------------------------
\223\ Data from Treasury (Sept. 30, 2010). All values are expended values. For prime contracts and financial
agency agreements, the subcontract values were deducted from the prime contract or financial agency agreement
expended value to avoid double counting. Data for contractors to financial agents is as of August 31, 2010.
\224\ One small business contract had a listed expended value that was less than the value of its subcontract.
This resulted in an expended value that was negative. As a result, this prime contract has been given an
expended value of zero for purposes of this Figure.
Despite OFS's efforts to promote small business contracting
opportunities, large businesses still receive the overwhelming
majority of prime contracts, \225\ both in terms of value and
number. OFS has not met Treasury's goals for small business
prime contracts. Indeed, less than 5 percent of prime contract
dollars go to small businesses, far short of the 28.5 percent
goal. Though not so far below the goal as for prime contracts,
OFS has also failed to meet Treasury's goals for subcontracting
dollars. Although Treasury has made efforts to include small
businesses, there remains room to improve.
---------------------------------------------------------------------------
\225\ A prime contract is the original contract.
---------------------------------------------------------------------------
Also of note is the limited involvement of women- and
minority-owned small businesses.\226\ Despite increases over
time in small business contracting, the situation has not
substantially improved with regard to minority- and women-owned
businesses. Only one prime contract has been awarded to a
minority-owned business. Trade associations representing
minority- and women-owned businesses, moreover, state that
Treasury has not reached out to them as it has done for small
businesses more generally.\227\ The Panel notes with concern
the lack of outreach to minority- and women-owned small
businesses.
---------------------------------------------------------------------------
\226\ Treasury has received considerable criticism on this point.
See, e.g., Senate Small Business Committee, Investing in Small
Business: Jumpstarting the Engines of our Economy (Jan. 29, 2009)
(online at sbc.senate.gov/public/
index.cfm?p=Hearings&ContentRecord_id=3fa523ec-8771-4093-ac96-
94f08aecba46&ContentType_id=14f995b9-dfa5-407a-9d35-
56cc7152a7ed&Group_id=43eb5e02-e987-4077-b9a7-
1e5a9cf28964&MonthDisplay=1&YearDisplay=2009); House Financial
Services, Subcommittee on Housing and Community Opportunity, Minorities
and Women in Financial Regulatory Reform: The Need for Increasing
Participation and Opportunities for Qualified Persons and Businesses
(May 12, 2010) (online at financialservices.house.gov/Hearings/
hearingDetails.aspx?NewsID=1066); James Byrne, Eye on Washington,
Minority Business Entrepreneur (May/June 2009); Marcia Wade Talbert,
Opportunities for Minority Contracts in TARP Limited, Business News
(Oct. 25, 2008) (online at www.blackenterprise.com/business/business-
news/2008/10/25/opportunities-for-minority-contracts-in-tarp-limited/).
\227\ National Association of Minority and Women Owned Law Firms
conversations with Panel staff (Sept. 30, 2010); National Association
of Real Estate Brokers conversations with Panel staff (Oct. 5, 2010);
National Association of Securities Professionals conversations with
Panel staff (Oct. 8, 2010).
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G. Evaluation of Transparency and Accountability
Transparency and accountability are of heightened
importance in the context of contracting.\228\ A contractor is
not a government entity. Its employees do not take an oath of
office, and it is not obligated to stand for election, so U.S.
citizens have no opportunity to cast a vote on its performance.
In this context, it is critical that Treasury use rigorous
transparency and accountability standards to ensure that the
public has access to the identities and performance records of
the private entities working with Treasury to implement the
TARP.
---------------------------------------------------------------------------
\228\ See Congressional Oversight Panel, Testimony of Allison
Stanger, Russell J. Leng '60 Professor of International Politics and
Economics, Middlebury College, Transcript: COP Hearing on Treasury's
Use of Private Contractors (Sept. 22, 2010) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-092210-
contracting.cfm) (hereinafter ``Testimony of Allison Stanger'') (``I am
increasingly convinced that getting as much information out in the
public domain and encouraging self-policing behavior, and encouraging
the American people to hold their government accountable is really the
key.'').
---------------------------------------------------------------------------
1. Transparency
A core element of the Panel's mandate is to examine the
``extent to which the information made available on
transactions under the [TARP] has contributed to market
transparency.'' \229\ In previous reports, the Panel has
examined this issue in detail, stressing the importance of
transparency with respect to a wide array of TARP programs and
institutions.\230\
---------------------------------------------------------------------------
\229\ 12 U.S.C. Sec. 5233(b)(1)(A)(iii).
\230\ See, e.g., August 2010 Oversight Report, supra note 80, at 4
(``In the interests of transparency and completeness, and to help
inform regulators actions in a world that is likely to become ever more
financially integrated, the Panel strongly urges Treasury to start now
to report more data about how TARP and other rescue funds flowed
internationally and to document the impact that the U.S. rescue had
overseas.'').
---------------------------------------------------------------------------
Treasury has disclosed a significant amount of information,
and in testimony before the Panel, one expert stated that
``Treasury earns strong marks for its transparency efforts.''
\231\ Yet despite Treasury's provision of basic information on
contractors and financial agents, and despite making the
contracts and agreements themselves publicly available, it may
be beneficial for Treasury to disclose key information in three
critical areas:
---------------------------------------------------------------------------
\231\ Congressional Oversight Panel, Written Testimony of Steven
Schooner, professor of law and co-director of the government
procurement law program, The George Washington University School of
Law, COP Hearing on Treasury's Use of Private Contractors, at 5 (Sept.
22, 2010) (online at cop.senate.gov/documents/testimony-092210-
schooner.pdf).
---------------------------------------------------------------------------
material information in arrangements,
including use of subcontractors;
performance under arrangements; and
monitoring procedures.
The absence of sufficient information in these three areas
reflects the critical difference between ``formalistic
transparency'' and ``meaningful transparency'' that was
highlighted in testimony before the Panel.\232\
---------------------------------------------------------------------------
\232\ See Id. at 5.
---------------------------------------------------------------------------
a. Disclosure of Material Information
Treasury has disclosed some information with respect to its
relationships with private entities, including the names of
both contractors and financial agents, the date the contract
was awarded, the value, and the anticipated end date. Treasury
posts a list of the contractors and financial agents, as well
as the documents themselves, on financialstability.gov.\233\
---------------------------------------------------------------------------
\233\ Treasury updates the site approximately every 30 days. List
of Procurement Contracts and Agreements Under EESA, supra note 8
(accessed Oct. 12, 2010); Treasury conversations with Panel staff (Aug.
30, 2010).
---------------------------------------------------------------------------
Not all material information is publicly available,
however. While Treasury provides basic information on the total
value of the contract and the general services to be provided
by the contractor, it does not provide ``detailed information''
on the contractor's obligations under the contract or on
specific expenses incurred.\234\ Many of the contracts are task
or delivery order contracts, where critical specifics typically
appear in task orders, rather than in the contracts
themselves.\235\ Treasury does not release these task orders to
the public; it maintains that it does not disclose them due to
the volume of the orders.\236\ Treasury also does not disclose
hourly rates for law firms. On one hand, Treasury should make
as much information available as possible, but on the other,
billing rates may be regarded as the type of trade secret that
traditionally has been exempted from disclosure requirements.
An expert testified before the Panel that while not ``all cost
or pricing data should be protected by the government,
protecting proprietary information is the general rule.'' \237\
---------------------------------------------------------------------------
\234\ June 2009 GAO Report on Transparency and Accountability,
supra note 57, at 84.
\235\ See Section D.1.a, supra.
\236\ Treasury conversations with Panel staff (Sept. 16, 2010).
\237\ Congressional Oversight Panel, Written Testimony of Scott
Amey, general counsel, Project on Government Oversight, COP Hearing on
Treasury's Use of Private Contractors, at 4 (Sept. 22, 2010) (online at
cop.senate.gov/documents/testimony-092210-amey.pdf).
---------------------------------------------------------------------------
In addition, Treasury does not publicly disclose detailed
information with respect to the names and duties of
subcontractors, nor does it publish the subcontracts
themselves. The result is that in cases in which contractors
delegate substantial portions of their duties to
subcontractors, the public possesses limited access to
information.\238\ Subcontractor status operates like an
umbrella, shielding contractors, financial agents, and Treasury
from the need to disclose valuable information about the
disposition of taxpayer funds.\239\
---------------------------------------------------------------------------
\238\ GAO has noted Treasury's subcontracting process and its
efforts to ensure that small businesses, minority-owned businesses, and
women-owned businesses are well-represented. See June 2009 GAO Report
on Transparency and Accountability, supra note 57, at 63-64. Of course,
while it may be true that a substantial percentage of subcontracts have
been awarded to these types of businesses, this evidence is obscured
from public view because it is not made publicly available. The fact
that it is not publicized makes it difficult to identify both cases of
concern, such as the Anderson contract example discussed in the
paragraph below, and success stories.
\239\ Based on past practice, it seems reasonable to think Treasury
would be capable of disclosing information on subcontractors. See
Congressional Oversight Panel, Written Testimony of Allison Stanger,
Russell Leng '60 Professor of International Politics and Economics,
Middlebury College, COP Hearing on Treasury's Use of Private
Contractors, at 6, 8 (Sept. 22, 2010) (online at cop.senate.gov/
documents/testimony-092210-stanger.pdf) (hereinafter ``Testimony of
Allison Stanger'') (``The old version of USAspending.gov used to have a
page entirely dedicated to subcontracts and linked to the home page. .
. . I stand ready to be persuaded otherwise, but to date, I have found
most concerns about the costs of transparency to be misplaced,
excessively focused on the short term at the expense of the
sustainable.'').
---------------------------------------------------------------------------
In one case, Treasury awarded a contract to a ``small
disadvantaged business''--Anderson, McCoy & Orta, an Oklahoma
City small business--which (with Treasury approval, as
required) in turn delegated roughly 80 percent of the contract
to Cadwalader, a ``large business.'' \240\ Thus, although on
the surface it appears that the contract is being performed by
a small business, in actuality a large business is essentially
responsible for performance.\241\ Because information on
subcontracts is not made public, this fact is likely to remain
obscured from public view.\242\
---------------------------------------------------------------------------
\240\ Data provided to Panel staff by Treasury (Aug. 27, 2010).
\241\ While it is not illegal for a small business contractor to
subcontract to a large business, this practice raises red flags. After
all, although a contractor is not obligated to subcontract with a small
business when it pursues a subcontract, the example in the text above
highlights one way in which limited disclosure makes it difficult for
the public to assess the degree to which small businesses are involved
in the implementation of the TARP.
\242\ Cf. October 2009 GAO Report on Transparency and
Accountability, supra note 207, at 28 (``The share of work by small
businesses--including minority-and women-owned businesses--under TARP
contracts and financial agency agreements has grown substantially since
November 2008, when only one of Treasury's prime contracts was with a
small business and only one minority small business firm was a
subcontractor with a large business contractor.'').
---------------------------------------------------------------------------
According to two experts who testified before the Panel,
one option for addressing concerns about disclosure is to
include more robust disclosure terms in future contracts and
agreements. In certain situations--such as the TARP, which was
designed and implemented during a period of extreme economic
upheaval--these provisions could require disclosure of certain
information that could be withheld during ``normal'' times
under other disclosure regimes. Such contracts could require
the disclosure of certain types of proprietary information.
Including such provisions would allow potential contractors and
agents to decide in advance whether they want to enter an
arrangement that imposes heightened disclosure
responsibilities. Yet in considering this option, it is
important to recognize that emergency situations may call for
Treasury to hire competent contractors within a very short
period of time. Program implementation should not be placed at
risk by incorporating disclosure provisions that discourage
potential bidders. On the other hand, in certain types of
economic emergencies, business considerations may put Treasury
in a strong negotiating position. In the fall of 2008, for
example, Wall Street firms--both law firms and financial
firms--were losing business rapidly. Simultaneously, Treasury
was soliciting contracts for work that was both lucrative and
prestigious. In such a situation, Treasury may be able to
secure qualified contractors despite the inclusion of expanded
disclosure provisions in the contracts.
b. Disclosure of Performance
Treasury publishes almost no information on the performance
of contractors and financial agents during the life of the
arrangement. For example, the monthly MHA reports mention the
activities of the HAMP compliance agent, but offer few
specifics on whether the agent is actually meeting performance
targets. There is even less information available on the
performance of other retained entities. This lack of disclosure
makes it hard to determine whether the process has been
aggressive, robust and transparent enough. As a result of this
lack of disclosure, it is impossible for the public to verify
that a retained entity is acting in accordance within the terms
of its arrangement or to advocate for arrangements to be
canceled when a contractor is performing poorly. Thus, in the
absence of more detailed information on performance while the
arrangement is active, any public concerns about a retained
entity's performance are likely to surface after it has already
been paid in full.
Other relevant aspects of performance are also not
disclosed to the public. While Treasury has provided detailed
guidance on how retained entities should address conflict of
interest issues, it does not disclose information concerning
ongoing conflict monitoring and mitigation efforts.\243\
Additionally, neither contractors nor financial agents have
published any qualitative information on ``best practices'' or
implementation challenges. The absence of this type of
qualitative information deprives future generations of
policymakers of a useful tool for learning how to deploy
contractors and agents effectively.\244\
---------------------------------------------------------------------------
\243\ After submitting their original conflict-of-interest
mitigation plans, some entities submitted amended plans to Treasury.
Data provided by Treasury staff to Panel staff (Sept. 14, 2010).
Nonetheless, Treasury does not publish these amended plans, nor does it
publish information on ongoing conflict assessments or ongoing
mitigation efforts. See also Testimony of Allison Stanger, supra note
228 (``[Y]ou really can't talk about mitigating conflicts of interest
until you see what the interests are. That's why I come down on the
side of radical transparency.'').
\244\ As noted in at the Panel's hearing on contracting, better
availability of ``best practices'' information would have assisted
government officials and retained entities in employing the best
possible processes for establishing and carrying out their TARP
contracts and agreements. See Congressional Oversight Panel, Testimony
of Steven Schooner, professor of law and co-director of the government
procurement law program, The George Washington University School of
Law, Transcript: COP Hearing on Treasury's Use of Private Contractors
(Sept. 22, 2010) (publication forthcoming) (online at cop.senate.gov/
hearings/library/hearing-092210-contracting.cfm) (``[F]rom an
aspirational standpoint, there's always room for improvement on a
contract-by-contract basis. We can all sit down and do better. Give
them a little more time and a lot more staff, a little bit of training
and some more best practices, there's plenty of room for
improvement.'').
---------------------------------------------------------------------------
c. Disclosure of Monitoring Procedures
Prior to the Panel's hearing on TARP contracting on
September 21, 2010, Treasury had not publicly disclosed
significant details about its procedures for monitoring TARP
contracts and agreements. Treasury testimony during the hearing
illuminated several of these monitoring procedures, including
daily oversight by COTRs for contracts and quantitative monthly
or quarterly measures for financial agents.\245\ While these
disclosures are useful in helping the public understand
Treasury's monitoring procedures, there are additional
disclosures that would enhance the transparency of the
monitoring process.
---------------------------------------------------------------------------
\245\ See Prepared Statement of Gary Grippo and Ronald Backes,
supra note 26, at 6.
---------------------------------------------------------------------------
First, Treasury does not make the results of its monitoring
efforts publicly available, so it is difficult to determine
whether these monitoring efforts are successful. Second,
Treasury created detailed ``Policies and Procedures'' to govern
its relationship with contractors and financial agents, \246\
but it has not made these documents public. Treasury maintains
that it generally does not disclose ``policies and procedures''
and that they are intended to be used solely for internal
processes.\247\ Regardless of past practice, disclosure of the
documents is particularly important with regard to financial
agents because of their unique status: unlike traditional
contractors who are awarded procurement contracts with the
federal government, financial agents are not subject to the
FAR.
---------------------------------------------------------------------------
\246\ See Section B.4, supra.
\247\ Treasury conversations with Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
2. Accountability
When it passed EESA, Congress emphasized the importance of
accountability. One of the statute's purposes was to ensure
that the use of TARP authority was subject to ``public
accountability.'' \248\ Notwithstanding this concern, EESA
enabled the Secretary to use private entities to implement the
TARP, even though private parties--unlike public officials--
would not be subject to traditional accountability mechanisms,
such as public elections, direct Congressional oversight, or
statutory disclosure regimes like the Freedom of Information
Act (FOIA). For these reasons, establishing rigorous oversight
mechanisms is essential to fulfilling Congress's mandate that
contractors and financial agents are held accountable.\249\
---------------------------------------------------------------------------
\248\ 12 U.S.C. Sec. 5201(2)(D).
\249\ See Senate Budget Committee, Written Testimony of James
Carafano, director, Douglas and Sarah Allison Center for Foreign Policy
Studies, The Heritage Foundation, Responsible Contracting: Modernizing
the Business of Government, at 1 (July 15, 2010) (online at
budget.senate.gov/democratic/testimony/2010/Carafano_Testimony_715.pdf)
(``Getting contracting right is a fundamental responsibility of good
governance--essential to the practice of limited government and fiscal
responsibility.'').
---------------------------------------------------------------------------
Treasury has taken several steps to attempt to enhance
accountability of contractors and financial agents, such as
making contracts and agreements available online, describing
financial agents' fiduciary duties in the text of the
agreements, assigning oversight responsibility to specific
Treasury employees, and training those employees to oversee
contractors' performance.\250\ Treasury also hired additional
full-time staff to assist with monitoring efforts.\251\
---------------------------------------------------------------------------
\250\ U.S. Government Accountability Office, Troubled Asset Relief
Program: March 2009 Status of Efforts to Address Transparency and
Accountability, at 39 (Mar. 2009) (GAO-09-504) (online at www.gao.gov/
new.items/d09504.pdf).
\251\ Data provided by Treasury staff to Panel staff (Sept. 15,
2010). While Treasury's decision to hire additional staff to monitor
contractors' performance constitutes a meaningful step toward enhancing
accountability, the scale of Treasury's contracting efforts--as well as
the myriad subcontract agreements that exist--suggests that Treasury
may still not have adequate capacity to conduct truly comprehensive
monitoring. In addition, the staffing challenge lies not only at the
first level of monitoring, but also at the second level: effective
monitoring necessitates that monitors are supervised such that they are
held accountable for their performance as well. Developing a system to
``monitor the monitors'' risks the creation of layer upon layer of
oversight.
---------------------------------------------------------------------------
Yet while Treasury has taken significant steps to improve
its accountability regime, the regime remains imperfect.
Treasury has failed to provide detailed, public descriptions of
its plans for holding contractors and agents accountable.\252\
Some of the earliest TARP contracts included weak language on
the contractors' transparency and accountability duties.\253\
For example, the contract with the law firm Simpson Thacher &
Bartlett LLP included no provisions on transparency and
accountability.\254\ Similarly, subcontractors of financial
agents are bound neither by agency law nor by the FAR.\255\ The
result is that some of the entities responsible for
implementing the TARP are subject to an amorphous
accountability regime.
---------------------------------------------------------------------------
\252\ Treasury created ``Policies and Procedures'' that provide
some guidance on its relationships with financial agents, but they
apply only to financial agents, provide few details on specific
accountability mechanisms (such as the methods Treasury will use to
monitor performance), and cover only five subject areas, omitting key
issues like public disclosure obligations. See Section B.4, supra.
\253\ See SIGTARP Initial Report to the Congress, supra note 54, at
5 (``SIGTARP also recommended that transparency and oversight-related
language be inserted in recent TARP contracts; Treasury included such
language in the recent auto industry, Citigroup, and Bank of America
contracts, making them far superior than earlier contracts from an
oversight perspective.'').
\254\ See U.S. Department of the Treasury, Contract Between U.S.
Department of the Treasury and Simpson Thacher & Bartlett (Oct. 10,
2008) (Contract No. TOFS-09-D-0009) (online at
www.financialstability.gov/docs/ContractsAgreements/
Simpson%20Contract%2010,10,08.pdf).
\255\ See Section B.1.b, supra.
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac provide relevant examples.\256\
Although they may be somewhat unique, they demonstrate some of
the shortcomings of the existing accountability regime. For
instance, although Treasury outlined broad, general goals for
HAMP in March 2009, Treasury has not announced specific
performance metrics for the program, nor has it revised its
initial objectives as circumstances have changed. In the
absence of benchmarks for the program that are both more
specific and more realistic, it is difficult to determine
whether Fannie Mae and Freddie Mac are performing adequately
under their financial agency agreements. Moreover, OFS has not
yet developed written procedures for oversight and monitoring
of the two entities, which makes it difficult for OFS to
monitor performance systematically and ``identify key risks''
in the program.\257\
---------------------------------------------------------------------------
\256\ See Annex I, infra.
\257\ U.S. Government Accountability Office, TARP Management
Report: Improvements are Needed in Internal Control Over Financial
Reporting for the Troubled Asset Relief Program, at 13 (June 30, 2010)
(GAO-10-743R) (online at www.gao.gov/new.items/d10743r.pdf)
(hereinafter ``June 2010 GAO Report on Internal Control Over Financial
Reporting'').
---------------------------------------------------------------------------
Moreover, contractors are not bound by the FOIA, a core
accountability tool that applies to federal agencies.\258\
Therefore, substantial portions of the work performed to
effectuate the TARP may be forever shielded from public
scrutiny. Without access to this information, it will be
challenging for the public to hold Treasury, as well as its
contractors, subcontractors, and financial agents, fully
accountable.\259\
---------------------------------------------------------------------------
\258\ FOIA obligates federal agencies to disclose requested
information unless they are able to show that it is covered by one of
nine exemptions. In contrast, contractors are permitted to disclose
requested information, but they are not obligated to do so. 5 U.S.C.
Sec. 552(b). See also Federal Acquisition Regulation, supra note 11, at
24.20. Likewise, financial agents are not compelled to comply with the
FOIA.
\259\ See Senate Budget Committee, Written Testimony of Allison
Stanger, Russell Leng '60 Professor of International Politics and
Economics, Middlebury College, Responsible Contracting: Modernizing the
Business of Government, at 7 (July 15, 2010) (online at
budget.senate.gov/
democratic/testimony/2010/Stanger_Testimony_715.pdf) (``The American
people need to be able to see where and how their tax dollars are
spent--right through to the sub-award level. Companies as well as
governments can operate with the purest of intentions, but if their
most important transactions are opaque to the public, they will lose
trust and effectiveness.'').
---------------------------------------------------------------------------
H. Discussion of Conflicts of Interest
As discussed in more detail in Section B, Treasury issued
the Interim Final Rule on January 21, 2009 to guide
contractors, financial agents, and subcontractors (collectively
referred to as ``retained entities'') in the performance of
their agreements with Treasury.\260\ The rule is relatively
extensive and comprehensive in some areas, but weak in others.
In terms of many traditional ethical issues--such as acceptance
of gifts and other sorts of ``bribes'' during the contract
solicitation process--the regulations are robust. Of the public
comments filed in response to the publication of the interim
rule, several opposed the rule on the grounds that it would
impose undue regulatory burdens on retained entities, and for
potential contractors, the costs of compliance would outweigh
the benefits of receiving the contract. According to these
comments, the effect would be to discourage the strongest firms
from bidding on TARP contracts and subcontracts. In contrast,
none of the public comments stated that the regulations were
too lax or insufficiently extensive.\261\
---------------------------------------------------------------------------
\260\ See Section B.3, supra (discussing the ``TARP Conflicts of
Interest'' regulations, which are codified in the Code of Federal
Regulations at 31 CFR Sec. 31).
\261\ See generally TARP Conflicts of Interest, supra note 37
(listing all public comments to the Interim Final Rule on TARP
Conflicts of Interest, none of which fault the rule for being
insufficiently extensive).
---------------------------------------------------------------------------
While it is challenging to address the merits of these
comments without more disclosure from Treasury and retained
entities--Treasury has not made information on compliance costs
or ongoing mitigation efforts publicly available--the public
comments on the IFR do reflect Treasury's broad conception of
its ``conflict of interest'' mandate. Section 107 of EESA
requires only that the Secretary ``issue regulations or
guidelines necessary to address and manage or to prohibit
conflicts of interest,'' including ``any other potential
conflict of interest, as the Secretary deems necessary or
appropriate in the public interest.'' \262\
---------------------------------------------------------------------------
\262\ 12 U.S.C. Sec. 5218(a).
---------------------------------------------------------------------------
Yet despite being faced with these sparse requirements,
Treasury drafted the IFR to include a broad array of provisions
covering a diverse set of subjects, regulating everything from
the disclosure of nonpublic information--including requiring
``periodic training'' for employees on the proper handling of
nonpublic information--to ``favors'' and gifts.\263\ Just as
the IFR takes steps beyond the minimal obligations imposed by
EESA in terms of the breadth of its coverage, it also takes a
robust approach in terms of the strictness of its methodology
for dealing with two core types of conflicts of interest: OCI
and PCI. EESA does not require Treasury to bar all conflicts of
interest: the statute permitted Treasury simply to develop
regulations to ``address and manage or to prohibit'' them.\264\
Instead, the IFR prohibits all OCIs and PCIs unless they have
been mitigated or Treasury waives them.\265\ The presumptive
prohibition seems to reflect an aggressive approach to certain
types of conflicts of interest.
---------------------------------------------------------------------------
\263\ 31 CFR Sec. Sec. 31.213(a)(1), 31.217(c)(3).
\264\ 12 U.S.C. Sec. 5218(a) (emphasis added).
\265\ 31 CFR Sec. 31.211(a); 31 CFR Sec. 31.212(a).
---------------------------------------------------------------------------
However, the regulations do not address all situations in
which conflicts of interest could arise. The Panel is concerned
about the potential for a conflict of interest to develop in
the following situations:
Treasury treats a retained entity differently
in Treasury's exercise of its public responsibilities;
A retained entity carries out its assignments
in a manner that serves its interest and not the public
interest;
A retained entity carries out its assignments
in a manner that serves the interest of the entity's
other clients;
A retained entity uses information it obtains
from its work for the TARP in a manner that benefits
itself or its other clients.
The discussion below lays out the basis for the Panel's
concerns in greater detail.
1. Treasury Gives Preferential Treatment to a Retained Entity
There are four situations in which Treasury's relationship
with a retained entity could compromise its ability to act
impartially in the exercise of its public responsibilities.
Treasury contracts with a firm and then seeks to
regulate the firm or its industry.
Treasury enters into an arrangement with a
contractor or financial agent--or that contractor or financial
agent enters into an arrangement with a subcontractor--and
subsequently intends to hire an employee from one of those
retained entities, or one of the retained entities intends to
hire a Treasury employee.
Treasury develops an overreliance on one specific
firm because it has entered multiple arrangements with that
firm.
Treasury hires a contractor or financial agent--
or that contractor or financial agent hires a subcontractor--
that needs government support in the future.
The remainder of this subsection addresses each of these
situations in turn.
a. Future Industry Regulation
Acting in its regulatory capacity, Treasury may need to
regulate a business that it is also employing to do work. It is
hard to see how Treasury could avoid the perception of a
conflict of interest if it implements industry-specific
regulations or regulates an individual business, and such
oversight could have direct implications for the ability of a
contractor or financial agent to perform.\266\ The perception
of a conflict may be particularly likely to arise if, as
discussed above, a company enters an arrangement with Treasury
at below-market rates and expects that it will receive
advantages in subsequent legislative, regulatory or enforcement
initiatives.
---------------------------------------------------------------------------
\266\ Treasury asserts that it maintains a wall between its
regulatory functions and its policy and political functions. Testimony
of Gary Grippo, supra note 49. Whether it maintains such a separation
or not, the perception of a conflict may nonetheless arise if it issues
regulations that appear to favor certain contractors, agents, or their
respective industries over others.
---------------------------------------------------------------------------
It is also possible that a firm could attempt to leverage
its relationship with Treasury to enhance its capacity to lobby
effectively with other regulators, such as the Federal Reserve
or the FDIC. This concern is particularly relevant in the wake
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act,\267\ when firms are engaged in intense lobbying of the
government as it begins the rulemaking process required by the
statute.
---------------------------------------------------------------------------
\267\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203 (2010).
---------------------------------------------------------------------------
b. Hiring
Although EESA explicitly requires the Secretary to issue
regulations that address ``post-employment restrictions on
employees,'' \268\ the IFR includes no provisions related to
this issue. According to the ``Supplemental Information''
provided in the Federal Register, the IFR omits this issue
because Treasury believes it is ``already adequately covered by
existing law.'' \269\
---------------------------------------------------------------------------
\268\ 12 U.S.C. Sec. 5218(a).
\269\ TARP Conflicts of Interest, supra note 37.
---------------------------------------------------------------------------
Existing regulations do provide guidance on this
issue.\270\ On his first day in office, President Barack Obama
issued an executive order that required government appointees
and lobbyists entering government to pledge not to work on
``any particular matter involving specific parties that is
directly and substantially related to my former employer or
former clients, including regulations and contracts'' for two
years. Employees leaving the government are also required to
take a pledge that they will abide by post-employment
communication restrictions and that they will refrain from
lobbying executive branch officials until the conclusion of the
Administration.\271\
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\270\ Executive Order 13490 of January 21, 2009: Ethics Commitments
by Executive Branch Personnel, 74 Fed. Reg. 4673 (Jan. 26, 2009)
(hereinafter ``Executive Order 13490''). Additional restrictions on
executive branch officials ``seeking other employment'' are published
in the Code of Federal Regulations at 5 CFR Sec. 2635.601 et seq.
\271\ Id.
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Despite the merit of these provisions, without more
disclosure from Treasury, it is difficult to determine whether
Treasury has confronted any potential conflicts issues for
either its employees seeking employment in the private sector
or for private sector employees seeking opportunities at
Treasury. Treasury does not publicly disclose information that
identifies the employment paths of its employees. As a result,
it is challenging to assess whether the issue of the
``revolving door'' has been addressed appropriately.\272\
---------------------------------------------------------------------------
\272\ Lawrence Lessig conversations with Panel staff (Sept. 23,
2010).
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c. Overreliance on Individual Firms
Ensuring that contracts and agreements are awarded to a
broad group of firms may be critical to minimizing conflicts of
interest.\273\ Awarding a large number or value of contracts or
agreements to one specific firm may leave Treasury overly
reliant on that particular institution. Such overreliance may
cause Treasury to be disproportionately dependent on certain
firms or industries. For example, Treasury may be less likely
to expedite meaningful reforms of Fannie Mae and Freddie Mac
when it has employed them for combined arrangements of $240.5
million and when these firms agreed to provide their services
at cost, receiving no profit from the deals.\274\ Forcing
senior Treasury officials into the simultaneous role of
regulator and client may place them in an awkward position.
Likewise, Treasury may be hesitant to implement certain types
of accounting reforms when it has an outstanding contract of
$24.6 million with PricewaterhouseCoopers, particularly when
such reforms would subject the investment of taxpayer funds to
more risk.\275\ In addition, Treasury awarded contracts of
roughly $27 million to Cadwalader, rather than distributing the
legal work among a wider array of law firms. As a whole,
disproportionate reliance on particular firms leaves Treasury
less nimble to consider the widest possible array of regulatory
options and also makes Treasury more vulnerable to lobbying
efforts by specific institutions and industries.
---------------------------------------------------------------------------
\273\ Treasury testified that its preference is to engage multiple
firms, rather than relying on a single entity. Congressional Oversight
Panel, Testimony of Ronald W. Backes, director of procurement services,
U.S. Department of the Treasury, Transcript: COP Hearing on Treasury's
Use of Private Contractors (Sept. 22, 2010) (publication forthcoming)
(online at cop.senate.gov/hearings/library/hearing-092210-
contracting.cfm).
\274\ Congressional Oversight Panel, Testimony of Joy Cianci,
senior vice president, Making Home Affordable Program, Fannie Mae,
Transcript: COP Hearing on Treasury's Use of Private Contractors (Sept.
22, 2010) (publication forthcoming) (online at cop.senate.gov/hearings/
library/hearing-092210-contracting.cfm) (hereinafter ``Testimony of Joy
Cianci''). See also Annex I, infra.
\275\ List of Procurement Contracts and Agreements Under EESA,
supra note 8.
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d. Future Government Support
The IFR does not prevent Treasury from providing
significant future financial support to entities that it has
hired as contractors in the past or that are performing work
for Treasury under a contract in the present.\276\ On one hand,
such a prohibition may appear to be unnecessary: Treasury's
criteria for providing any assistance should focus on the
institution's importance to the broader economy and the extent
of its need for assistance, not on whether Treasury has
existing arrangements with the institution.
---------------------------------------------------------------------------
\276\ The Secretary's authority to make all funding commitments
under the TARP ended on October 3, 2010. See 12 U.S.C. Sec. 5230(b).
However, in the future, it is conceivable that the government could
provide financial support to institutions under a different program.
---------------------------------------------------------------------------
But on the other hand, Treasury's previous or ongoing
relations with a company may skew its view of both of these
criteria. Perhaps Treasury would be inclined to perceive an
institution as more important if it was performing substantial,
valuable work as a contractor. Or perhaps it would be less
reluctant to allow an institution to fail if failure meant that
a company would not be able to perform a contract for which it
had already been paid. Companies may also exert pressure on
Treasury, particularly if they contract with the government at
standard government rates, which are often below-market
rates.\277\ For example, Fannie Mae and Freddie Mac agreed to
provide services at cost, receiving no profits from the
agreements.\278\ Firms that agree to such arrangements may
believe that their willingness to provide services at cheap
rates entitles them to a better deal when they run into
financial difficulties. On the other hand, it may be improbable
that Treasury would give such firms preferential treatment in
light of the likelihood that the size of the contracts would be
small relative to the scope of the firms' financial
difficulties.\279\ However, given the absence of specific
provisions in the IFR related to this issue, as well as an
absence of any additional guidance from Treasury, it is not
clear how Treasury would address this situation.\280\ Without
more concrete guidance on this issue, it is possible that
future awards of financial assistance to contractors and
financial agents could raise the appearance of a conflict of
interest.
---------------------------------------------------------------------------
\277\ See Section H.1.a, supra.
\278\ Testimony of Joy Cianci, supra note 274. See also Annex I,
infra.
\279\ For example, as discussed in more detail in Annex I, infra,
the combined obligated value of the Fannie Mae and Freddie Mac
agreements is approximately $219 million, but both firms reported
combined losses in excess of $108 billion in 2008.
\280\ See Letter from Danielle Brian, executive director, Project
on Government Oversight, to the Chairs and Ranking Members of the
Senate Committee on Banking, Housing, and Urban Affairs, the Senate
Committee on Finance, the House Committee on Financial Services, and
the Joint Economic Committee (May 19, 2009) (online at www.pogo.org/
pogo-files/letters/financial-oversight/er-b-20090519.html) (hereinafter
``Letter from Danielle Brian to Congressional Leadership'') (``It is
imperative that Treasury establish strong conflict of interest policies
for the TARP, because while the firms that were awarded TARP
procurement contracts also have to follow the conflict of interest
rules in the Federal Acquisition Regulation, it appears that other
firms are being retained as `financial agents' and would only have to
follow the TARP rules.'').
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2. Retained Entity Serves its own Interest and Not the Public Interest
A significant concern is that a contractor will carry out
its contractual responsibilities so as to serve its own
interest, rather than the public interest.\281\ When there is a
melding of government and private entities--in terms of both
interests and personnel--it may be difficult to pinpoint how
and where public interests align with private interests and how
and where they diverge. For example, the GSEs may have an
interest in maximizing the performance of their mortgage loan
portfolios, which could potentially conflict with their
responsibilities to administer HAMP and enforce servicer
compliance uniformly.\282\ In addition, the GSEs may have
sought these agreements in order to curry favor with Treasury
despite the fact that the agreements do not contribute to their
long-term profitability.
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\281\ See, e.g., Testimony of Allison Stanger, supra note 239, at
6, 8 (``Government by contract means that government is entirely
dependent on the private sector to conduct its daily business, so
effective oversight is too often hostage to a corporate bottom
line.'').
\282\ See Annex I, infra.
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It is very challenging to develop regulations that are
sufficient to address this concern fully, as it is almost
inevitable that any rule or contract will allow some
flexibility for entities to make independent decisions that
could prioritize their own interests over others. While the IFR
includes provisions that address many aspects of this concern,
such as its prohibitions on organizational conflicts of
interest, there are still opportunities for retained entities
to act to maximize their own self-interest.\283\ Perhaps the
most effective tool to minimize this possibility is to include
strong provisions in the contract to bind retained entities to
perform at a high level that serves the public interest.\284\
As described in more detail in Sections C and D, Treasury has
adopted robust provisions in many of its contracts and
agreements, and many of its monitoring and compliance
procedures appear to be stringent. Nonetheless, the Panel
believes that it is important to continue to monitor this issue
to ensure that contractors serve the public interest. The Panel
also recognizes that if errors are made during the selection
process, there may be some conflicts that cannot be mitigated
even if they are subjected to an intensive monitoring process.
---------------------------------------------------------------------------
\283\ Transcript Testimony of Scott Amey, supra note 37 (``I think
that there are possible ways to get around these conflicts, because
just mitigating them and coming up with firewalls that somebody in a
different building [sic] doesn't seem to be adequate to me.'').
\284\ See Section G.1.a, supra.
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3. Retained Entity Serves its Clients' Interest and Not the Public
Interest
It is also conceivable that a retained entity would act to
promote the interest of its clients, rather than the public
interest. As discussed above, the IFR and the arrangements
themselves include provisions that attempt to ensure that the
entity provides the services requested by the government. The
introduction to the rule acknowledges that ``retained entities
may find that their duty to private clients impairs their
objectivity when advising Treasury.'' \285\ Even so, it is
inevitable that some flexibility will remain that would allow
an entity to promote private, rather than public, interests.
For example, the GSEs' business relationships with servicers
could potentially conflict with their duties to administer HAMP
uniformly and to ensure that servicers comply with the
program's guidelines.\286\ Likewise, the choice of Cadwalader
raises questions about conflicts since the firm has represented
a number of TARP recipients, including General Motors and
Ally.\287\ It is important to continue to monitor Treasury's
arrangements with private entities to ensure that they act in
the public interest as much as possible. In order to ensure
that these monitoring efforts are robust, it is important to
know both the clients of retained entities and their relative
importance to the firm.\288\
---------------------------------------------------------------------------
\285\ TARP Conflicts of Interest, supra note 37.
\286\ See Annex I, infra.
\287\ In total, Cadwalader represented three clients with respect
to which it also represented Treasury: GM, Ally Financial, and First
Bancorp. It maintains that the aggregate revenues from these three
clients accounted for less than 1 percent of the firm's revenues in
each of the last five years. Data provided by Treasury and Cadwalader
to Panel staff (Oct. 5, 2010). Treasury maintains that Cadwalader did
not perform TARP-related work for any of its clients. Treasury
conversations with Panel staff (Sept. 28, 2010).
\288\ With respect to Cadwalader, the Panel requested information
regarding clients' relative importance to the firm. However, Treasury
declined to request this information from its client.
---------------------------------------------------------------------------
It merits mention that the Panel invited Cadwalader to
testify at its September 22, 2010 hearing, entitled
``Treasury's Use of Private Contractors.'' In a letter to the
Panel on September 21, 2010, John J. Rapisardi, co-chairman of
Cadwalader's Financial Restructuring Department, declined the
invitation, citing ``the difficulty [testifying] would cause in
protecting the privilege of both the United States Treasury and
our other clients in this forum.'' The letter also stated that
the firm was ``willing to provide the Panel with pertinent
information provided that the interests of the Firm's clients
are not prejudiced.'' \289\ This deference to the interests of
the firm's clients perfectly illustrates the potential
conflicts that could result from Treasury's contracting
procedures.
---------------------------------------------------------------------------
\289\ Letter from John J. Rapisardi, co-chairman of Cadwalader's
Financial Restructuring Department, to Naomi Baum, executive director
of the Congressional Oversight Panel (Sept. 21, 2010) (emphasis added).
---------------------------------------------------------------------------
4. Retained Entity Uses Nonpublic Information to Benefit Itself or its
Clients
The IFR contains provisions that govern the use of
nonpublic information. The introduction to the rule states that
``retained entities may find that their duty to private clients
impairs . . . their judgment about the proper use of nonpublic
information.'' \290\ An entire subsection of the rule deals
with confidentiality issues.\291\ It specifies that nonpublic
information should not be disclosed unless necessary and should
not be used ``to further any private interest other than as
contemplated by the arrangement.'' \292\ It also requires each
retained entity to take ``appropriate measures to ensure the
confidentiality of nonpublic information and to prevent its
inappropriate use'' and to ``document these measures in
sufficient detail to demonstrate compliance.'' \293\
---------------------------------------------------------------------------
\290\ TARP Conflicts of Interest, supra note 37.
\291\ 31 CFR Sec. 31.217.
\292\ 31 CFR Sec. 31.217(b).
\293\ 31 CFR Sec. 31.217(c).
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In testimony before the Panel, BNY Mellon outlined a series
of steps it has taken in an attempt to mitigate potential
problems that could arise from its possession of sensitive
information.\294\ It used information barrier policies that
limit information sharing on a ``need to know'' basis, a
restricted securities list, ``enhanced access controls'' for
TARP-related documents (including electronic files),
nondisclosure agreements, and physical separation of employees
servicing the TARP from employees engaged in asset management
activities. At an individual level, employees are required to
provide disclosures on a quarterly basis, and they are
restricted from certain personal trading activities.\295\ It is
not clear, however, that all firms have conflict mitigation
processes that are as robust as BNY Mellon's.
---------------------------------------------------------------------------
\294\ AllianceBernstein has instituted similarly robust conflict
mitigation procedures. AllianceBernstein conversations with Panel staff
(Sept. 30, 2010).
\295\ Congressional Oversight Panel, Written Testimony of Mark
Musi, chief compliance and ethics officer, Bank of New York Mellon, COP
Hearing on Treasury's Use of Private Contractors, at 3 (Sept. 22, 2010)
(online at cop.senate.gov/documents/testimony-092210-musi.pdf).
---------------------------------------------------------------------------
Yet despite Treasury's commendable efforts to restrict the
inappropriate use of nonpublic information, it is extremely
difficult to eliminate the concern entirely. Employees of
retained entities may be exposed to nonpublic information that
would benefit them in future private pursuits, long after the
termination of the TARP relationship. Similarly, the
information could assist their lobbying strategies or other
types of future engagement with the government. For these
reasons, this concern should be monitored even after the TARP
expires.
5. Does the IFR Alleviate Conflicts of Interest?
As discussed above, the IFR does not address several key
situations that could result in conflicts of interest. Without
more guidance, it is possible that if any of these situations
were to arise, the public could perceive that a conflict of
interest exists. In addition, because much of the monitoring of
conflicts of interest is based on self-disclosure by retained
entities, Treasury may not have sufficient information to
ensure that all relevant conflicts are addressed.\296\ The
weaknesses of the IFR create a ripe opportunity for Treasury to
fill these gaps in the final version of the rule.
Alternatively, ``radical transparency'' of information on
contracts, financial agreements, and subcontracts, including
disclosure of ongoing conflict-of-interest monitoring efforts,
could help to alleviate the perception of conflicts.\297\
---------------------------------------------------------------------------
\296\ Letter from Danielle Brian to Congressional Leadership, supra
note 280 (``[I]t appears that both the Fed and Treasury are mostly
relying on the asset managers for self-disclosure.''). Treasury has
stated that it ``independently review[s] the conflicts posture'' for
all retained entities and that the IFR was intended solely to outline
the responsibilities of retained entities, not to reflect or narrow the
range of monitoring activities that Treasury is entitled to undertake
on its own. Testimony of Gary Grippo, supra note 49; Treasury
conversations with Panel staff (Sept. 23, 2010). Nonetheless, Treasury
largely relies upon self-disclosure by these entities of the underlying
data regarding potential conflicts issues, and then it uses this data
as the basis of its own review. Most importantly, it is possible for
entities to withhold information from Treasury, and it is difficult for
Treasury to then uncover this information with the level of granularity
necessary to identify a potential conflict of interest.
\297\ For an extended discussion of the benefits of transparency
and areas in which enhanced transparency may be possible, see Section
G, supra.
---------------------------------------------------------------------------
More broadly, however, the conflict-of-interest regulations
highlight the fundamental conundrum that plagues the TARP's
implementation: when 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? This tension is evidenced with
respect to specific institutions. When Morgan Stanley, for
example, is acting as a financial agent for the U.S.
government, will Treasury's ability to develop fair economic
policies for the financial industry be compromised? Similarly,
the cases of Fannie Mae and Freddie Mac are evidence of some of
the possible conflicts that may persist despite the presence of
the IFR and Treasury's monitoring regime.\298\ In addition, to
what extent would truly robust conflict-of-interest regulations
impede Treasury's ability to hire the highest-performing
contractors and financial agents? While it is in Treasury's
interest to remain attractive to the private entities capable
of the best performance and to generate the highest possible
rates of return on its investments, Treasury must also develop
policies that are consistent with public values, such as
fairness and transparency. In some instances, these values
necessarily impose costs, making the contracts less appealing
to private firms. At the same time, these costs are critical to
ensuring that the public understands how the government uses
its money, who receives this money, and the quality of the work
that the government receives for the money it spends.
---------------------------------------------------------------------------
\298\ See Annex I, infra.
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I. Activities of Other Oversight Bodies
As part of their broader duty to oversee the TARP, GAO and
SIGTARP have explored the issue of TARP contracting and intend
to publish further on this subject near the time of this
report's release.
SIGTARP has released seven quarterly reports to Congress
since the enactment of EESA. Each of these reports has briefly
discussed or offered recommendations regarding an element of
TARP contracting.\299\ SIGTARP's initial report to Congress,
released on February 6, 2009, recommended that all TARP
agreements be posted online. This recommendation was fully
implemented on January 28, 2009.\300\ Furthermore, the majority
of SIGTARP reports have cautioned that conflicts of interest
may exist at any level of the TARP's administration.
---------------------------------------------------------------------------
\299\ See Office of the Special Inspector General for the Troubled
Asset Relief Program, Quarterly Report to Congress, at 147-151 (Apr.
21, 2009) (online at www.sigtarp.gov/reports/congress/2009/
April2009_Quarterly_Report_to_Congress.pdf); Office of the Special
Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress, at 91-92, 171-183 (July 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/
July2009_Quarterly_Report_to_Congress.pdf); Office of the Special
Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress, at 87, 159-161 (Oct. 21, 2009) (online at
www.sigtarp.gov/reports/congress/2009/
October2009_Quarterly_Report_to_Congress.pdf) (hereinafter ``Quarterly
Report to Congress''); Office of the Special Inspector General for the
Troubled Asset Relief Program, Quarterly Report to Congress, at 140-141
(Jan. 30, 2010) (online at www.sigtarp.gov/reports/congress/2010/
January2010_Quarterly_Report_to_Congress.pdf); Office of the Special
Inspector General for the Troubled Asset Relief Program, Quarterly
Report to Congress, at 25-28 (July 21, 2010) (online at
www.sigtarp.gov/reports/congress/2010/
July2010_Quarterly_Report_to_Congress.pdf) (hereinafter ``July 2010
SIGTARP Report'').
\300\ SIGTARP Initial Report to the Congress, supra note 54.
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On May 14, 2010, SIGTARP sent an engagement memo to Herbert
M. Allison, Jr., the then-Assistant Treasury Secretary for
Financial Stability, detailing its intention to audit
Treasury's process in procuring professional services for
TARP.\301\ This audit aims to accomplish two goals: (1) to
assess whether the contract prices for these services were fair
and reasonable; and (2) to examine the invoices delivered by
the contractors to establish whether they reflect actual work
completed.
---------------------------------------------------------------------------
\301\ Office of the Special Inspector General for the Troubled
Asset Relief Program, Engagement Memo--Review of Treasury's Process for
Contracting for Professional Services Under the Troubled Asset Relief
Program (May 14, 2010) (online at www.sigtarp.gov/reports/audit/2010/
SIGTARP%20Memo%20Contracting%20for%20Professional%20services%205.14.10.p
df).
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In addition to its work on TARP contracting, SIGTARP has
also addressed issues relating to PPIP. The Audit Division of
SIGTARP currently has two audits focused on PPIP, one on
internal controls and one on the selection of asset managers.
The scope of these audits includes the criteria used in the
selection of managers, issues of conflicts of interests, as
well as internal controls and compliance.\302\ The results of
SIGTARP's internal compliance audit, including recommendations
for Treasury, have so far been evidenced by a series of
letters.\303\ SIGTARP released the audit report on the
selection of asset managers on October 7, 2010.\304\ Due to
SIGTARP's engagement in this area, contracts with the PPIP
asset managers are not examined in this report.
---------------------------------------------------------------------------
\302\ July 2010 SIGTARP Report, supra note 299, at 25-28. Treasury
selected the following fund managers for PPIP: AllianceBernstein L.P.
and its sub-advisors Greenfield Partners, LLC and Rialto Capital
Management, LLC; Angelo, Gordon & Co., L.P. and GE Capital Real Estate;
BlackRock, Inc.; Invesco Ltd.; Marathon Asset Management, L.P.; Oaktree
Capital Management, L.P.; RLJ Western Asset Management, LP.; The TCW
Group, Inc.; and Wellington Management Company, LLP. U.S. Department of
the Treasury, Legacy Securities Public-Private Investment Program
(Sept. 17, 2010) (online at www.financialstability.gov/roadtostability/
legacysecurities.html#press).
\303\ July 2010 SIGTARP Report, supra note 299, at 281-282.
\304\ SIGTARP Report on PPIP, supra note 5.
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In early November, GAO plans to release a report focusing
specifically on TARP contracting. The report will provide an
assessment of the effectiveness of Treasury's contracting under
the TARP as well as its implementation of recommendations.
J. Conclusion and Recommendations
The TARP was unique in its size and scope and the speed
with which it was implemented. In light of these factors, it is
not surprising that the government sought outside assistance.
Indeed, although the overall amount expended on outsourced work
is significant, it is relatively modest in light of the size of
the TARP itself. As more work is pushed to private contractors
and agents, however, inevitable and perhaps troubling
consequences become apparent. Accountability and transparency
decrease, and the potential for conflicts of interest
increases. The particular requirements of the TARP exacerbated
these problems, as some of the services required by Treasury
were obtained from law firms and financial institutions that
are not by their nature transparent and have many other clients
operating in the financial industry, which may have interests
that conflict with those of the government.
As discussed above, Treasury has been responsive in
adopting the recommendations of oversight bodies, and has
earned some praise from the GAO and expert witnesses both for
its contracting process and the transparency of its process.
Despite the pressing needs of the financial crisis, Treasury
complied with the FAR, although it could have waived its
provisions, and in some circumstances went above and beyond
what it was required to do. This praise must be viewed in
context, however. Government contracting is notoriously
nontransparent, and it is possible to perform well on a
comparative basis, and yet be capable of significant
improvement.
The Panel recommends that Treasury address the following
issues:
Treasury should include performance incentives in
contracts and agreements, where appropriate.
Transparency and accountability
--Material facts: Critical information, such as task
orders, should be made public. In the future, Treasury
should consider including more stringent disclosure
provisions in contracts and agreements so as to
obligate retained entities to disclose all relevant
material information.
--Rationale and decision-making process: Treasury
should better explain its rationale and decision-making
process behind choosing to use contractors and
financial agents rather than performing a specific
function within Treasury. This is especially important
in cases where Treasury enters into contracts or
financial agency agreements with institutions like
Fannie Mae and Freddie Mac that have received or are
likely to receive substantial government assistance.
--Performance: Treasury should regularly publish
progress updates on the performance of contractors and
financial agents. Treasury should publish qualitative
information on progress made by contractors and
financial agents that include information on ``best
practices'' and implementation challenges.
--Monitoring procedures: Treasury should disclose the
results of its efforts to monitor contracts and
agreements. Treasury should also publicly release its
``Policies and Procedures'' documents and information
concerning the control Treasury retains over the
direction of the TARP, the types of oversight Treasury
exercises over its TARP contractors and financial
agents, and the level of input that TARP contractors
and financial agents have with respect to program
development, execution, and policy decisions.
--Accountability: Treasury should provide detailed,
public descriptions of its plans for holding
contractors and agents accountable, including the
processes it plans to employ to promote a culture of
accountability for subcontractors. Any such plans
should detail the level of disclosure that is necessary
to hold contractors, agents, and subcontractors
accountable.
Subcontracting
--Material facts: Treasury should require all
contractors to disclose the names and duties of all
subcontractors, the values of the subcontracts, and the
subcontracts themselves.
--Small business plans: Treasury should require its
financial agents to submit small business
subcontracting plans, and Treasury should make this
information publicly available. Treasury should also
seek to make more subcontracts available to small
businesses.
Conflicts of Interest
--Final rule on conflicts: Treasury should adopt a
final rule on conflicts of interest for contractors,
agents, and subcontractors. Nearly 22 months have
passed since the IFR was issued, far longer than the
60-day notice and comment period. A final rule will
provide retained entities with more regulatory
certainty.
--Immediate disclosure of all conflicts and
mitigation efforts: Treasury should disclose detailed,
ongoing conflict-of-interest findings for all entities,
including ongoing conflict mitigation efforts and the
information upon which these findings are based. Where
possible, Treasury should remove the redactions of
material conflict-of-interest information.
--Ongoing disclosure: Treasury should also make
regular disclosures of conflicts of interest that arise
in the course of the performance of the arrangement,
which should include updated information on entities'
mitigation efforts.
--Compliance costs: Treasury contractors, agents, and
subcontractors should publish costs they have incurred
in complying with the IFR.
--Plans for addressing conflicts of interest:
Treasury should develop and publicize plans for
addressing the four potential conflicts of interest
discussed in this report: (1) preferential treatment of
retained entities by Treasury, (2) retained entities
that serve their own interests, rather than the public
interest, (3) retained entities that serve their
clients' interests, rather than the public interest,
and (4) retained entities that use nonpublic
information to benefit themselves or their clients.
--Self-disclosure: While Treasury clearly takes its
responsibility for monitoring conflicts seriously, it
relies on contractors and agents to provide most of the
underlying data upon which their reviews are based.
While this may largely be due to the scope and scale of
the arrangements, Treasury should consider alternatives
that make it less reliant on the retained entities for
factual information, such as conducting intensive spot
checks on individual entities.
ANNEX I: FANNIE MAE AND FREDDIE MAC: A CASE STUDY
Here, the Panel examines in-depth issues related to two of
the financial agency agreements that Treasury has entered into
under EESA: those with Fannie Mae and Freddie Mac. The Panel is
examining these two contracts in more detail for two reasons.
First, these financial agency agreements together represent the
largest part of the TARP procurement contract and financial
agency agreement universe. Of the $436.7 million in total
obligated value for all TARP procurement contracts and
financial agency agreements, Treasury has obligated $126.7
million under Fannie Mae's financial agency agreement and $88.9
million under Freddie Mac's financial agency agreement. To
date, Treasury has expended $111.3 million and $79.3 million on
its financial agency agreements with Fannie Mae and Freddie
Mac, respectively.\305\ Second, Fannie Mae and Freddie Mac have
such a key responsibility in a program designed to prevent
qualified borrowers from losing their homes through foreclosure
and, as such, play an instrumental role in implementing one of
the core purposes of EESA--homeownership preservation.\306\ The
Panel intends to pursue this topic further in its November 2010
report on the status of Treasury's foreclosure mitigation
efforts.
---------------------------------------------------------------------------
\305\ For comparative purposes, while Treasury had expended less
than $500 million on HAMP mortgage modifications as of September 30,
2010, its expenditures under its Fannie Mae and Freddie Mac agreements
currently equal $190.6 million.
\306\ 12 U.S.C. Sec. 5201.
---------------------------------------------------------------------------
In February 2009, Treasury entered into financial agency
agreements with Fannie Mae and Freddie Mac to provide services
under the Administration's MHA program, which provides mortgage
relief to qualifying homeowners. Treasury executed financial
agency agreements with Fannie Mae and Freddie Mac to administer
and enforce compliance with HAMP, respectively.\307\ These
roles are distinct from these entities' participation in HAMP
as holders or guarantors of mortgages.
---------------------------------------------------------------------------
\307\ HAMP is designed to help struggling homeowners avoid
foreclosure by reducing their monthly mortgage payments to 31 percent
of their pretax monthly income. In order to be eligible, a borrower
must meet three criteria: (1) the borrower must be delinquent on their
mortgage or facing imminent risk of default; (2) the property must be
the borrower's primary residence; and (3) the mortgage was originated
before January 1, 2009 and the unpaid principal balance must be no
greater than $729,750. If a borrower is eligible, participating
servicers will then reduce the borrower's mortgage payment for a trial
period. If the borrower successfully makes payments and provides
certain documentation for three months, then the modification is made
``permanent,'' for five years. For further information about, and
discussion concerning, HAMP, see March 2009 Oversight Report, supra
note 3; October 2009 Oversight Report, supra note 3; April 2010
Oversight Report, supra note 3.
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac are government-sponsored
enterprises (GSEs) chartered by Congress with a mission of
providing liquidity, stability, and affordability to the U.S.
housing and mortgage markets. Fannie Mae and Freddie Mac
operate in the U.S. secondary mortgage market by purchasing and
securitizing mortgages, rather than making direct mortgage
loans.\308\
---------------------------------------------------------------------------
\308\ Congress established Fannie Mae in 1938 to create a secondary
market for loans insured by the Federal Housing Administration (FHA),
but its charter was amended in 1954 so that it could focus on the
secondary market more generally. In 1970, Congress established Freddie
Mac as a new government-chartered entity to provide an additional
source of liquidity for mortgage loans. Office of Management and
Budget, Analytical Perspectives: Budget of the U.S. Government, Fiscal
Year 2011, at 349 (Feb. 1, 2010) (online at www.whitehouse.gov/sites/
default/files/omb/budget/fy2011/assets/spec.pdf) (hereinafter
``Analytical Perspectives: Budget of the U.S. Government, FY 2011'').
---------------------------------------------------------------------------
The features of Fannie Mae's and Freddie Mac's government
charters (for example, a line of credit with Treasury, public
mission requirements, limited competition, and lower capital
requirements) created the perception of a government guarantee,
which played a part in the GSEs becoming significantly
overleveraged and undercapitalized. In 2008, Fannie Mae and
Freddie Mac reported combined losses in excess of $108
billion.\309\ The Federal Housing Finance Agency (FHFA), the
regulator for Fannie Mae and Freddie Mac, placed Fannie Mae and
Freddie Mac into conservatorship on September 6, 2008, and they
continue to function as government-backed enterprises.\310\
---------------------------------------------------------------------------
\309\ Federally regulated banks must hold 4 percent capital against
their mortgages, but Fannie Mae and Freddie Mac were required to hold
only 2.5 percent capital against their on-balance sheet mortgage
portfolio, and only 0.45 percent against mortgages they guaranteed. See
House Committee on Financial Services, Written Testimony of Timothy F.
Geithner, Secretary, U.S. Department of the Treasury, Housing Finance--
What Should the New System Be Able to Do?: Part I--Government and
Stakeholder Perspectives, at 8-11 (Mar. 23, 2010) (online at
www.house.gov/apps/list/hearing/financialsvcs_dem/testimony_-
_geithner.pdf).
\310\ In connection with the GSEs being placed into
conservatorship, Treasury agreed to provide financial support to the
GSEs through the establishment of Preferred Stock Purchase Agreements.
In December 2009, Treasury decided to replace the $200 billion cap on
Treasury's funding commitment to each GSE with a formulaic cap that
increases above $200 billion by the amount of any losses and decreases
by any gains (but not below $200 billion), which will become permanent
at the end of three years. See Analytical Perspectives: Budget of the
U.S. Government, FY 2011, supra note 308, at 350.
---------------------------------------------------------------------------
Edward J. DeMarco, the acting director of FHFA, recently
described their legal status in testimony before the House
Subcommittee on Capital Markets, Insurance, and Government-
Sponsored Enterprises. According to Mr. DeMarco, ``[t]he
statutory purpose of conservatorship is to preserve and
conserve each company's assets and put them in a sound and
solvent condition. The goals of conservatorship are to help
restore confidence in the companies, enhance their capacity to
fulfill their mission, and mitigate the systemic risk that
contributed directly to instability in financial markets. The
Enterprises are responsible for normal business activities and
day-to-day operations, subject to FHFA supervision. FHFA
exercises oversight as safety and soundness regulator, and, as
conservator, holds the powers of the management, board, and
shareholders of each Enterprise.'' \311\ Mr. DeMarco commented
further that ``[a] principal focus of the conservatorships is
to maintain the Enterprises' secondary mortgage market role
until legislation produces a resolution of their future. FHFA's
oversight is also directed toward minimizing losses, limiting
risk exposure, and ensuring the Enterprises price their
services to address their costs and risk adequately. He also
stated that ``neither company would be capable of serving the
mortgage market today without the ongoing financial support
provided by the Treasury.'' \312\ Although Fannie Mae and
Freddie Mac have been delisted, their stocks continue to trade
over the counter.
---------------------------------------------------------------------------
\311\ House Financial Services, Subcommittee on Capital Markets,
Insurance, and Government-Sponsored Enterprises, Written Testimony of
Edward J. DeMarco, acting director, Federal Housing Finance Agency, The
Future of Housing Finance: A Progress Update on the GSEs, at 2 (Sept.
15, 2010) (online at financialservices.house.gov/Media/file/hearings/
111/DeMarco091510.pdf).
\312\ Id. at 2.
---------------------------------------------------------------------------
Even though Fannie Mae and Freddie Mac have a complicated
legal relationship with the government as a result of their
being placed into conservatorship over two years ago, they
became the government's financial agents when they agreed to
perform HAMP administration and compliance for the Treasury
Department. As discussed above, this results in their having a
fiduciary obligation of loyalty and fair dealing to Treasury,
including the requirement to act in the best interests of
Treasury, and not their own interests, in performance of their
duties under the agreements.\313\
---------------------------------------------------------------------------
\313\ For further discussion concerning the nature of financial
agents and the confines of the principal-agent legal relationship, see
Sections A and B.1.b, supra.
---------------------------------------------------------------------------
A. Role of Fannie Mae in HAMP
In serving as the administrator for HAMP, Fannie Mae's
principal responsibilities include: implementing the guidelines
and policies for the program and preparing the requisite forms;
instructing participating mortgage servicers how to modify
loans; serving as paying agent to calculate subsidies and
compensation consistent with program guidelines; serving as
recordkeeper for executed loan modifications and program
administration; and coordinating with Treasury and other
parties toward achievement of the program's goals.\314\ By also
functioning as the program interface for servicers, Fannie Mae
provides information and resources to servicers to implement
the program.
---------------------------------------------------------------------------
\314\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit A.
---------------------------------------------------------------------------
B. Role of Freddie Mac in HAMP
As the compliance agent responsible for the HAMP Compliance
Program, Freddie Mac is responsible for ensuring that servicers
are satisfying their obligations under the HAMP Servicer
Participation Agreements.\315\ Because of the confidential and
proprietary information to which it has access, Freddie Mac has
established a separate and independent division to conduct its
compliance activities, named Making Home Affordable-Compliance
(MHA-C), which is responsible for evaluating and reporting to
Treasury on mortgage servicers participating in HAMP and their
compliance with HAMP requirements. In addition, Treasury asked
Freddie Mac, in its role as compliance agent, to develop a
``second look'' process pursuant to which MHA-C audits a sample
of HAMP modification requests to double-check the servicer's
determination on the request.
---------------------------------------------------------------------------
\315\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit A.
---------------------------------------------------------------------------
C. Analysis of Treasury's Selection of Fannie Mae and Freddie Mac
In April 2010, the Panel stated: ``Treasury still needs to
provide detailed public information related to its selection
and use of Fannie Mae as financial agent and HAMP program
administrator and Freddie Mac as compliance agent. The
effectiveness of the financial agent/program administrator and
financial agent/compliance agent is instrumental to the success
and accountability of HAMP, making the selection process for
these agents especially important.'' \316\
---------------------------------------------------------------------------
\316\ April 2010 Oversight Report, supra note 3, at 88.
---------------------------------------------------------------------------
At the Panel's September 22, 2010 hearing on Treasury's use
of its exceptional crisis contracting authority under EESA,
Deputy Assistant Secretary Gary Grippo provided further
background regarding Treasury's decision-making with respect to
selecting Fannie Mae and Freddie Mac as its financial agents.
Mr. Grippo stated that Treasury selected Fannie Mae and Freddie
Mac to perform HAMP-related duties and responsibilities after
making the determination that no other public or private
entities (including FHFA and not-for-profits) had the operating
capabilities, infrastructure, and resources to operate a
foreclosure mitigation program on a national scale.\317\
---------------------------------------------------------------------------
\317\ Testimony of Gary Grippo, supra note 49.
---------------------------------------------------------------------------
In further conversations between Treasury and the Panel
staff, however, it has become apparent that Treasury selected
Fannie Mae and Freddie Mac based on three criteria.
First, given their housing knowledge of a
nationwide scope and resources and capabilities they acquired
in the course of performing their unique role in housing
finance markets (including loss mitigation expertise), Treasury
determined that the GSEs possessed the unique ability to set up
a nationwide program such as HAMP. Since the Administration
initially projected that HAMP would assist up to 3 to 4 million
at-risk homeowners,\318\ selecting institutions with the pre-
existing capacity and infrastructure became particularly
important.\319\
---------------------------------------------------------------------------
\318\ U.S. Department of the Treasury, Making Home Affordable:
Updated Detailed Program Description (Mar. 4, 2009) (online at
www.treas.gov/press/releases/reports/housing_fact_sheet.pdf).
\319\ Treasury conversations with Panel staff (Sept. 27, 2010).
---------------------------------------------------------------------------
Second, Treasury's determination was also based
in part upon the time frame for implementing HAMP. It was
critical for Treasury to select agents that were capable of
getting a large program off the ground quickly since HAMP was
launched just several weeks after it was announced.\320\
---------------------------------------------------------------------------
\320\ Treasury conversations with Panel staff (Sept. 27, 2010).
---------------------------------------------------------------------------
Finally, as part of the market research that it
conducted in October 2008 with respect to the purchases of
troubled assets from troubled financial institutions, Treasury
identified the GSEs as being very well qualified to help
administer and operate a large program on a nationwide
scope.\321\
---------------------------------------------------------------------------
\321\ Treasury conversations with Panel staff (Sept. 27, 2010).
---------------------------------------------------------------------------
In early 2009 (during the midst of a financial crisis), it
is likely that other public or private sector alternatives
might have been available to assist Treasury with TARP-related
services and responsibilities.\322\ However, on the one hand as
discussed above, it is not clear that Treasury had other time-
effective options given the relative infrastructure,
capabilities, and resources issues that were at the crux of the
GSEs' selection. On the other hand, the extent to which the
GSEs had the infrastructure, capabilities, and resources is not
absolutely clear given the amount of subcontracting they
engaged in to help fulfill their responsibilities. Treasury
never considered the Federal Housing Administration (FHA),
which provides mortgage insurance on loans made by FHA-approved
lenders throughout the United States and its territories, to be
a viable option because it ``lacked the infrastructure given
its market footprint and the nature of its business as an
insurer.'' \323\ According to Mr. Grippo, ``[s]imply put, we
made a determination that there were no other parties with the
capabilities and infrastructure to operate a national mortgage
modification program. And I can point to experiences that we
had in October and November of 2008 in making that
determination.'' \324\ The decision to select the GSEs for
these responsibilities, however, was made with the approval and
encouragement of FHFA.\325\
---------------------------------------------------------------------------
\322\ The Panel notes that Fannie Mae and Freddie Mac entered into
subcontracts with for-profit companies to assist with their HAMP-
related responsibilities during this time. However, it is important to
note that other potential alternatives, including Wells Fargo and Bank
of America, who were facing their own balance sheet issues at the time,
received substantial TARP assistance, and may not have been capable of
carrying out such duties and responsibilities over the long-term.
\323\ Treasury conversations with Panel staff (Oct. 7, 2010).
\324\ Testimony of Gary Grippo, supra note 49; Treasury
conversations with Panel staff (Oct. 7, 2010).
In his testimony, Mr. Grippo noted that the GSEs are unique since
they ``have connections to all the servicers across the country'' and
``have the information technology capability to manage information
related to millions of loans at the loan level, as well as the human
capital to implement a national program.''
In conversations with Panel staff, Mr. Grippo also noted that in
October 2008, Treasury launched (but ultimately did not commence) two
programs to purchase troubled assets--a program to purchase residential
mortgage-backed securities and a program to purchase whole loans--
directly from the institutions that held them. As part of this process,
Treasury issued a public notice soliciting interest from financial
institutions to serve as financial agents to administer the whole loan
purchase program. More than 70 institutions (including both Fannie Mae
and Freddie Mac) submitted bids indicating that they were best
qualified to be tasked with this responsibility. After conducting due
diligence and a thorough evaluation, Treasury concluded that the only
entities that could operationally manage this task were the GSEs since
they had, among other resources and capabilities, the loan-level
information technology requirements and pre-existing servicer
relationships. If Treasury had commenced this program, it would have
selected the GSEs to assist with the program. Once the Administration
decided in early 2009 to launch a foreclosure mitigation program
centered on mortgage modifications, however, Treasury again concluded
that the GSEs were best able to set up such a program in a ``reasonable
amount of time.'' The GSEs' selection was a consensus decision made by
the Treasury Department, the National Economic Council, and the
Department of Housing and Urban Development after extensive
consultation, meetings, policy discussions, and consideration of other
options. Whereas other private sector options (including private
commercial banks) might have been viable options for performing credit
risk and asset management services, Treasury concluded that the GSEs
were exclusively capable of helping administer a mortgage modification
program. Treasury conversations with Panel staff (Oct. 7, 2010).
\325\ Treasury conversations with Panel staff (Oct. 7, 2010)
(during which Mr. Grippo indicated that FHFA ``was involved from the
very beginning,'' provided its explicit authorization for Treasury's
selection, and ``always had firsthand knowledge of everything.''); FHFA
conversations with Panel staff (Oct. 8, 2010); Caroline Herron, former
vice president and HAMP consultant, Fannie Mae, conversations with
Panel staff (Oct. 6, 2010).
In conversations with Panel staff, FHFA representatives stated that
their approval of Treasury's decision to enter into financial agency
agreements with Fannie Mae and Freddie Mac was based on two criteria.
First, the GSEs have the statutory authority to perform various types
of services for the Federal Reserve, home loan banks, and other
governmental entities. They are also authorized to be employed as
fiscal or other agents of the federal government, and the Secretary of
the Treasury is authorized to make those designations. FHFA determined
that the roles that Treasury would task Fannie Mae and Freddie Mac with
were consistent with the goals of the conservatorship process (for
example, a loss mitigation program would help minimize losses by
stabilizing the markets and benefitting the GSEs' portfolios). Second,
the GSEs had the operational capabilities (including servicer
relationships, leadership, and familiarity with housing finance issues)
to successfully manage such tasks.
FHFA also noted that while Treasury had initially proposed that the
GSEs would be performing the same tasks under HAMP, it advised Treasury
to reallocate those roles and give them different responsibilities.
---------------------------------------------------------------------------
Testimony from the Panel's recent hearing, however,
suggests that the roles of Fannie Mae and Freddie Mac as
financial agents were not simply an extension of what they were
already doing and also that they may not have had the operating
capabilities and infrastructure to operate a national
foreclosure mitigation program. For example, given that the
responsibilities that Freddie Mac is tasked with under its
financial agency agreement are somewhat different from the
other types of compliance activities it conducts, it needed to
hire staff and recruit personnel with a slightly different
skill set (for example, strong auditors that understood
controls and control-based auditing). Paul Heran, program
executive for MHA-C at Freddie Mac, stated that after being
asked by Treasury in February 2009 to serve as HAMP compliance
agent, Freddie Mac's task ``essentially was to create a wholly
new business function and organization, hire staff (which . . .
included transferring qualified personnel from the existing
Freddie Mac organization), and begin operations immediately.''
\326\ The type of work Treasury asked Fannie Mae to perform as
HAMP administrator is also not within its core competence, nor
does Fannie Mae have experience as a client consulting company.
These issues raise important questions as to whether Treasury's
decision-making undermined the conservatorship process (and
exposed the GSEs to additional risk) by transferring qualified
personnel that could otherwise have focused their efforts on
returning the GSEs to a sound and solvent condition.
---------------------------------------------------------------------------
\326\ Testimony of Paul Heran, supra note 173, at 1.
---------------------------------------------------------------------------
On one hand, Treasury's decision to contract with Fannie
Mae and Freddie Mac after they were placed into conservatorship
has caused some to raise concerns about whether the government
was intending to affect their solvency by awarding them large
financial agency agreements. New York Times columnist David
Brooks recently commented that ``agencies fail and get rewarded
with more responsibilities.'' \327\ Vesting Fannie Mae and
Freddie Mac with key roles in a program designed to help
stabilize the entire housing market may have provided further
benefit and stability to the GSEs on a macroeconomic level. It
may be that the resources Fannie Mae and Freddie Mac are
devoting to their HAMP responsibilities are simply surplus
resources within these two firms during a housing market
downturn (which, in the absence of the HAMP work, would be left
idle). Viewed in this light, Treasury's decision is only
appropriate if using the GSEs is more cost-effective and
efficient than turning to other federal resources or
contracting with other private firms.
---------------------------------------------------------------------------
\327\ David Brooks, The Responsibility Deficit, New York Times
(Sept. 23, 2010) (online at www.nytimes.com/2010/09/24/opinion/
24brooks.html).
---------------------------------------------------------------------------
On the other hand, the TARP financial agency agreements
with Fannie Mae and Freddie Mac are not material in relation to
the economics of the conservancy of those firms.\328\ As
discussed above, it is difficult to envision a scenario where
these financial agency agreements had any material bearing on
either firm's financial health, given the relative small size
of the contracted amount, in the context of the more than $90
billion in losses reported between the two GSEs in 2009.\329\
Any concern as to whether Treasury's decision-making was
intended to affect the GSEs' solvency is further lessened by
the nature of Fannie Mae's and Freddie Mac's financial agency
agreements with the Treasury Department, which are ``set at
cost, with no mark-up for profit.'' \330\ Furthermore, Mr.
Grippo testified at the Panel's recent hearing that Treasury's
decision-making in engaging Fannie Mae and Freddie Mac as
financial agents was not driven by a desire to prop them
up.\331\ ``We had engaged the operating capability of the GSEs.
Their information technology, their ability to deal with dozens
if not hundreds of servicers in implementing HAMP.'' \332\
Treasury has not used ``those parts of their business related
to their credit risk management standards, how they ran their
own portfolio, or any other credit risk decisions that they
made in the subprime space.'' \333\ The Panel notes, however,
that the HAMP engagement, although not dispositive to the
economic survival of Fannie Mae and Freddie Mac, did give the
GSEs the opportunity to present themselves in the best possible
light to the Treasury officials who may well be involved in
determining the GSEs' ultimate fate.
---------------------------------------------------------------------------
\328\ If Fannie Mae and Freddie Mac were to collect the full
obligated value under their financial agency agreements, it would
amount to $219 million. Since their conservatorship is going to cost
the federal government several hundred billion dollars, the entire TARP
financial agency agreements, at the maximum possible amount, represent
only a fraction of the conservatorship amount.
\329\ For further discussion concerning how Treasury decided what
functions to contract out in making its contracting and financial agent
designations, see Section C.1, supra. See also footnote 78, supra, for
further discussion concerning how the TARP financial agency agreements
represent a small percentage of Fannie Mae and Freddie Mac's annual net
revenue.
\330\ Congressional Oversight Panel, Written Testimony of Joy
Cianci, senior vice president, Making Home Affordable Program, Fannie
Mae, COP Hearing on Treasury's Use of Private Contractors, at 4 (Sept.
22, 2010) (online at cop.senate.gov/documents/testimony-092210-
cianci.pdf) (hereinafter ``Written Testimony of Joy Cianci''); Treasury
and Freddie Mac conversations with Panel staff (Sept. 27, 2010). The
Panel notes that although the GSEs' financial agency agreements are at-
cost, with no mark-up for profit, the subcontracts they have entered
into to help carry out their HAMP-related responsibilities are not at-
cost, but allow the subcontractors to generate profit. Given that the
taxpayers will ultimately cover all of the costs of HAMP, either
because of their ownership stakes in Fannie Mae and Freddie Mac or
because they ultimately pay all of Treasury's bills, taxpayers may not
be indifferent as to how much Fannie Mae and Freddie Mac are being
compensated.
While the financial agency agreements for both Fannie Mae and
Freddie Mac provide each with the opportunity to receive performance
incentive payments, Treasury has indicated that no such incentive
payments have been made, and has taken the incentive payment clause off
the table indefinitely. Treasury conversations with Panel staff (Sept.
22, 2010). See also Testimony of Joy Cianci, supra note 274 (stating
that ``[t]here was a provision in the original contract that provided
for the potential for incentives. We have not received incentives to
date. And we're in the process of working through a revision to that
contract. My understanding is that there will not be an incentive
framework forward.'').
\331\ Testimony of Gary Grippo, supra note 49.
\332\ Id.
\333\ Id.
---------------------------------------------------------------------------
D. Discussion of Conflicts of Interest
In addition to the IFR, which binds all of Treasury's
arrangements with contractors and financial agents, Fannie Mae
and Freddie Mac are subject to the conflicts of interest
mitigation and information barriers contained within their
respective financial agency agreements. These internal controls
center on the responsibilities of Fannie Mae and Freddie Mac to
ensure the non-disclosure of non-public information and certain
program information to personnel involved with other Fannie Mae
or Freddie Mac (or subcontractor) activities that may conflict
with duties owed by the GSEs to Treasury. According to the
GSEs' financial agency agreements, there are four actual or
potential conflicts of interest associated with their status as
financial agents.\334\ These four actual or potential conflicts
appear to be comprehensive and carefully thought-out:
---------------------------------------------------------------------------
\334\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F; Financial Agency Agreement Between
Treasury and Freddie Mac, supra note 122, at Exhibit F.
---------------------------------------------------------------------------
The GSEs' interests in maximizing the
performance and minimizing the costs of their retained
and guaranteed mortgage loan portfolios, which could
potentially conflict with their responsibilities to
administer HAMP uniformly and for all borrowers and
investors and enforce servicer compliance with program
guidelines, respectively;
The GSEs' business relationships with
servicers, which could potentially conflict with their
duties to administer HAMP uniformly and enforce
servicer compliance with program guidelines,
respectively;
The GSEs' interests in benefitting from HAMP
interest rate or principal reduction payments and loan
modifications of mortgages in their own portfolios
(whether owned or guaranteed), which could potentially
conflict with their duties to administer HAMP uniformly
for all investors and enforce servicer compliance with
program guidelines, respectively; and
The financial interest of GSE employees in
banks or investment funds that could receive or benefit
from HAMP interest rate or principal reduction
payments, which could potentially conflict with the
interests of Treasury.
As the list above demonstrates, Fannie Mae and Freddie Mac
appear to have more obvious conflicts of interest than any
other contractor or financial agent. Although HAMP operates to
modify non-GSE mortgages, there is a companion program under
HAMP to modify GSE mortgages. As discussed in several of the
Panel's previous reports, the federal government committed $75
billion to HAMP, with $50 billion of TARP funds allocated to
modify private-label mortgages and $25 billion from the Housing
and Economic Recovery Act (HERA) to modify GSE mortgages.\335\
According to the August 2010 Making Home Affordable Program
report, 55.2 percent of active permanent and trial loan
modifications that have taken place since the program's
inception are actually GSE modifications.\336\ That the
majority of the modifications under HAMP involve mortgages that
the GSEs hold or guarantee means that the potential exists for
a substantial financial conflict of interest. In a prior
report, the Panel noted that ``these dual roles--as `doers' of
mortgage modifications for loans that they own or guarantee and
`overseers' of Treasury's mortgage modification program--may
present competing interests or diminish the overall
effectiveness of Fannie Mae's and Freddie Mac's ability to
modify mortgages, engage in HAMP administration or oversight,
or both.'' \337\ At the Panel's recent hearing, Mr. Heran
stated that while MHA-C ``is responsible for evaluating
compliance for non-GSE loans only,'' the GSEs themselves (under
the supervision of FHFA) are responsible for evaluating
compliance for GSE loans.\338\ This means that while MHA-C does
not conduct compliance for mortgages owned or guaranteed by
Freddie Mac, another department within Freddie Mac is charged
with those responsibilities.\339\ The Panel is not convinced as
to the appropriateness of and logic underlying this particular
allocation of responsibilities.
---------------------------------------------------------------------------
\335\ October 2009 Oversight Report, supra note 3; April 2010
Oversight Report, supra note 3.
\336\ U.S. Department of the Treasury, Making Home Affordable
Program: Servicer Performance Report Through August 2010 (Sept. 22,
2010) (online at www.financialstability.gov/docs/
AugustMHAPublic2010.pdf) (hereinafter ``Servicer Performance Report
through August 2010'').
\337\ April 2010 Oversight Report, supra note 3, at 88.
\338\ Congressional Oversight Panel, Testimony of Paul Heran,
program executive, Making Home Affordable--Compliance, Freddie Mac,
Transcript: COP Hearing on Treasury's Use of Private Contractors (Sept.
22, 2010) (publication forthcoming) (online at cop.senate.gov/hearings/
library/hearing-092210-contracting.cfm).
\339\ Id.
---------------------------------------------------------------------------
With respect to the issues arising out of Fannie Mae's and
Freddie Mac's ownership or guarantees of mortgage portfolios
that could conflict with financial agency agreements, there are
several mitigating factors worth noting. First, as discussed
above, Fannie Mae and Freddie Mac, as financial agents and
fiduciaries of Treasury, owe a duty to look solely to the best
interests of Treasury without considering the interests of
other clients or its own proprietary interests. This helps
ensure that the GSEs will carry out their assignments in a
manner that serves the public interest instead of their own
interests. In order to carry out these functions, Fannie Mae
and Freddie Mac created distinct business units that are
segregated from and operate separate and apart from their books
of business. Second, Treasury receives advice from two GSEs as
well as from other third-party advisers. Third, Treasury
retains sole responsibility for developing the HAMP program
guidelines, and both GSEs are obligated to comply with those
guidelines. Fourth, both Fannie Mae and Freddie Mac must
develop and implement an information barrier policy to prevent
``misuse of material non-public information to benefit'' their
portfolios (i.e., insider trading) and a firewall with respect
to employees and systems and databases with information
regarding modifications of mortgages backing mortgage-backed
securities in their portfolios.\340\ Fifth, Fannie Mae does not
receive any incentive payments to fund loan modifications or
fees to servicers and investors for modifications of loans that
it owns (other than in its capacity as an investor in mortgage-
backed securities).\341\
---------------------------------------------------------------------------
\340\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F; Financial Agency Agreement Between
Treasury and Freddie Mac, supra note 122, at Exhibit F.
\341\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F; Written Testimony of Joy Cianci, supra
note 330, at 3 (stating that ``[i]t should be noted that Treasury does
not pay, and Fannie Mae does not receive, incentives under the Program
for modifications of Fannie Mae-owned loans.'').
---------------------------------------------------------------------------
Finally, FHFA provides an additional layer of oversight in
its role as conservator. It closely monitors Fannie Mae's and
Freddie Mac's compliance with the financial agency agreements
and the nature of the tasks Treasury asks them to perform on an
ongoing basis, in addition to helping ensure that the GSEs'
HAMP responsibilities are segregated completely from their
business lines.\342\
---------------------------------------------------------------------------
\342\ FHFA conversations with Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
There are several mitigating factors to address the
conflict arising out of the GSEs' business relationships with
servicers. Treasury's relationships with Fannie Mae and Freddie
Mac are structured so that one GSE--Fannie Mae--is charged with
program administration and a different GSE--Freddie Mac--is
responsible for auditing servicer performance under HAMP. For
its part, Freddie Mac was required to adopt an internal policy
establishing the principle that in its performance under the
financial agency agreement, all decisions are to be made solely
based upon the HAMP program objectives and requirements
(without consideration of potential benefit to mortgage sellers
or servicers with whom it does business or to itself via
modifications of mortgages that it owns or guarantees).\343\
Freddie Mac is also required to submit copies of its servicer
audits to Treasury upon request.\344\ In addition, Treasury
retains the right under the financial agency agreements to
oversee and audit their performance.\345\
---------------------------------------------------------------------------
\343\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F.
\344\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F. While this requirement likely limits the
exercise of discretion in the audit process (and hence the latitude of
Freddie Mac to treat certain servicers more favorably than others), it
does not totally eliminate that discretion.
\345\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Sec. 17.
---------------------------------------------------------------------------
With respect to issues concerning personal and
organizational conflicts of interest, Fannie Mae and Freddie
Mac, in entering into their financial agency agreements, agreed
that all management officials and key individuals would be
subject to a code of ethics and associated insider trading
policy.\346\ Furthermore, each must certify on a quarterly
basis that it has no organizational or personal conflicts of
interest.\347\
---------------------------------------------------------------------------
\346\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F.
\347\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit F.
---------------------------------------------------------------------------
It could be argued that it is implausible and impractical
for Fannie Mae and Freddie Mac to conduct modifications of
mortgages they own or guarantee and maintain business
relationships with servicers while simultaneously conducting
independent contracting roles under HAMP. If Treasury selects
contractors or financial agents with clear structural
conflicts, or portfolios with interests adverse to Treasury's,
that may raise an immitigable conflict because the interests
are not aligned (regardless of whether mitigation procedures
are implemented). Since a key objective of the conservatorship
process is to minimize losses, it might appear that Treasury
and FHFA have incentives to allow Fannie Mae and Freddie Mac to
use material non-public information gained from their HAMP
contracting roles that might ultimately be beneficial to the
GSEs' bottom lines as they conduct their own mortgage
modifications.\348\ On the other hand, the financial agency
agreements were set up in different ways and established to
achieve different goals, suggesting the importance Treasury has
given to mitigating conflicts of interest and implementing a
rigorous set of mitigation procedures. Additionally, the GSEs
appear to have taken their obligations to comply with
Treasury's conflict of interest regulations in all required
areas seriously, creating separate business units dedicated to
carrying out their HAMP responsibilities (and accountable under
their financial agency agreements to Treasury) and, as
discussed above, deploying a variety of conflict mitigation
techniques.\349\
---------------------------------------------------------------------------
\348\ From the perspective of the taxpayers (who became majority
shareholders of Fannie Mae and Freddie Mac as a result of their
placement into conservatorship), this conflict may not be as troubling
as it may seem since the public may want the GSEs to use information
gained as a result of their roles as financial agents to aid them in
modifying their own mortgages, given that the taxpayers directly bear
the costs of distressed mortgage loans owned or guaranteed by the GSEs
(while not directly bearing the costs resulting from distressed non-GSE
mortgages).
\349\ For example, in conversations with Panel staff, Fannie Mae
indicated that it has reported 18 incidents (or potential breaches of
its obligations) to Treasury over the course of its financial agency
agreement. Such reporting includes minor matters such as a carrier's
temporary misplacement of a box containing the names and addresses of
potential borrowers.
---------------------------------------------------------------------------
As illustrated by the complexities described above, the
fundamental issue with Fannie Mae and Freddie Mac in their
roles as financial agents is whether they are simply extensions
of the federal government itself.\350\ This question is
somewhat challenging to answer because, as discussed above, the
GSEs are not legally government agencies and their employees
are not civil servants, but they have been operating under
conservatorship by the FHFA and would likely not have survived
without the financial assistance provided by Treasury. If they
are really private entities with their own financial interests
independent of the federal government's, then the real and
perceived conflicts of interest seem vast and unmanageable. If
they are just arms of the federal government at this point,
however, then any real or perceived conflicts likely evaporate.
The manner in which Treasury is treating the GSEs (for example,
they are being compensated at cost for the work they are
doing--they are earning zero profit) in some ways gives the
appearance that they are government entities, underlining the
tension created by the anomalous position of Fannie Mae and
Freddie Mac.
---------------------------------------------------------------------------
\350\ In August 2009, the Congressional Budget Office (CBO)
addressed these issues by noting that because of the ``extraordinary
degree of management and financial control now exercise[d] over them,''
along with their ``unique legal status and a long history linking them
closely to the federal government,'' they should be considered federal
operations, even though they ``had been considered private firms owned
by their shareholders.'' Therefore, CBO concluded that it would be
``appropriate and useful to policymakers to account for and display the
GSEs' financial transactions alongside other federal activities in the
budget.'' Congressional Budget Office, The Budget and Economic Outlook:
An Update, at 8 (Aug. 2009) (online at www.cbo.gov/ftpdocs/105xx/
doc10521/08-25-BudgetUpdate.pdf). For its part, however, the Office of
Management and Budget (OMB) continues to treat the GSEs as ``non-
budgetary private entities in conservatorship rather than as Government
agencies'' because they ``remain private companies with Boards of
Directors and management responsible for their day-to-day operations.''
Analytical Perspectives: Budget of the U.S. Government, FY 2011, supra
note 308, at 140.
---------------------------------------------------------------------------
E. Evaluation of Small Business Contracting
The financial agency agreements for both Fannie Mae and
Freddie Mac provide a floor for the GSEs' use of small business
contractors, including minority- or women-owned contractors. In
entering into their financial agency agreements with the
Treasury Department, Fannie Mae and Freddie Mac agreed to
``engage one or more small businesses as contractors, including
minority- or women-owned businesses,'' in fulfilling their
responsibilities.\351\
---------------------------------------------------------------------------
\351\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Sec. 15 and Sec. 16.
---------------------------------------------------------------------------
Fannie Mae and Freddie Mac have selected subcontractors and
vendors to support their duties as HAMP program administrator
and compliance agent, respectively, using the standard
competitive bidding process (unless time-to-market pressures
necessitate otherwise), and have complied with its obligation
to engage women-owned and minority-owned small businesses.\352\
In total, Fannie Mae has awarded contracts to ``19 small and
diverse companies'' in furtherance of its duties as HAMP
compliance agent for Treasury.\353\ Freddie Mac has indicated
that 25 percent of the subcontractors it has hired are
minority- or women-owned.\354\
---------------------------------------------------------------------------
\352\ Written Testimony of Joy Cianci, supra note 330, at 4;
Treasury and Freddie Mac conversations with Panel staff (Sept. 27,
2010).
\353\ Written Testimony of Joy Cianci, supra note 330, at 4.
\354\ Treasury and Freddie Mac conversations with Panel staff
(Sept. 27, 2010).
---------------------------------------------------------------------------
F. Evaluation of Treasury's Monitoring
1. Treasury's Monitoring of Performance and Compliance
OFS has developed a comprehensive regime of documents,
standards, and continual reviews to assess performance and
financial agency agreement compliance.
Treasury has a comprehensive oversight structure in place
to oversee and monitor Fannie Mae's activities as Treasury's
financial agent.\355\ The Homeownership Preservation Office
(HPO) has a collaborative relationship with the OFA, CFO, and
OFS-Compliance teams. Five members of the OFS-Compliance staff
work exclusively on conflicts of interest matters for all
contractors and financial agents, and almost all staffers
within HPO have regular and substantial interactions with
Fannie Mae.\356\ In addition to the Making Home Affordable
program committee that meets weekly, Treasury has also
established several working committees (centered on compliance,
budgeting, and governance issues) to oversee Fannie Mae. These
committees meet on a regular basis and include interlocking
membership from each of the different Treasury offices
(referenced above) that is tasked with monitoring and oversight
responsibilities for Fannie Mae.\357\
---------------------------------------------------------------------------
\355\ Treasury and Fannie Mae conversations with Panel staff (Oct.
4, 2010).
\356\ Treasury and Fannie Mae conversations with Panel staff (Oct.
4, 2010).
\357\ Treasury and Fannie Mae conversations with Panel staff (Oct.
4, 2010).
---------------------------------------------------------------------------
Treasury's monitoring and supervision of the GSEs are
closely coordinated with general oversight and risk assessment
by FHFA as part of the conservatorship process. Members of the
FHFA conservatorship team continuously oversee Fannie Mae's and
Freddie Mac's financial agency agreements, monitor the tasks
that Treasury asks the GSEs to perform as a risk assessment
measure, and help ensure that they are compensated
appropriately for their work.\358\
---------------------------------------------------------------------------
\358\ FHFA conversations with Panel staff (Oct. 4, 2010).
---------------------------------------------------------------------------
Senior-level officials within OFS direct and closely
monitor Freddie Mac's activities as Treasury's financial agent,
and OFS has four employees assigned to work full-time to
oversee Freddie Mac, three of whom work full time on-site in
Freddie Mac's office.\359\ Additionally, Treasury's MHA
Compliance Committee (composed of senior Treasury officials
leading the MHA program and chaired by the director of
compliance at OFS) meets weekly with Freddie Mac's MHA-C senior
management team to discuss the program's status, issues and
challenges.\360\
---------------------------------------------------------------------------
\359\ Treasury conversations with Panel staff (Sept. 23, 2010);
Testimony of Paul Heran, supra note 173, at 2.
\360\ Treasury conversations with Panel staff (Sept. 23, 2010);
Testimony of Paul Heran, supra note 173, at 2.
---------------------------------------------------------------------------
As with its other contractors and financial agents, there
are several metrics that Treasury uses to evaluate and manage
Fannie Mae's and Freddie Mac's performance and compliance with
their financial agency agreements. Since financial agents have
a fiduciary obligation to Treasury (and therefore serve as an
extension of Treasury), OFS has developed specific processes to
measure performance and ensure compliance. The process for
monitoring the performance and compliance of these financial
agents is contained in their respective financial agency
agreements.
On the performance side, these include qualitative measures
(such as assessments of cost containment, responsiveness, and
nature of their business relationship with Treasury), and
quantitative measures (such as how they process transactions,
the timeliness and accuracy of their reports, and the number of
servicer reviews conducted).\361\ OFA collects quantitative
measures on a quarterly or monthly basis to monitor the agents'
performance, balancing ``objective measurements (for example,
quantitative counts of work products) and subjective
measurements (for example, survey responses).'' \362\
Additionally, informal communications between Treasury and the
GSEs are regular and continuous, which suggests that the level
of interaction is best characterized as constant
involvement.\363\
---------------------------------------------------------------------------
\361\ Testimony of Gary Grippo, supra note 49.
\362\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 6.
\363\ Treasury and Freddie Mac conversations with Panel staff
(Sept. 27, 2010); Treasury and Fannie Mae conversations with Panel
staff (Oct. 4, 2010).
---------------------------------------------------------------------------
On the compliance side, the GSEs are required to report to
Treasury on internal controls, risk assessments, information
technology security, employee training, and how they have
revisited their conflicts of interest mitigation plans.\364\
The financial agency agreements also require that Fannie Mae
and Freddie Mac self-certify annually that they are complying
with 11 selected terms of the agreements and review the
effectiveness of their internal controls on an annual
basis.\365\ On an annual basis, Treasury staff conduct on-site
visits to review the processes and controls of each agent at
their offices.\366\ Treasury also requires agents to submit
information regarding conflicts of interest, which it reviews
on an on-going basis.\367\
---------------------------------------------------------------------------
\364\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122; Financial Agency Agreement Between Treasury and Freddie
Mac, supra note 122.
\365\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Sec. 16, Exhibit D; Financial Agency Agreement
Between Treasury and Freddie Mac, supra note 122, at Sec. 16, Exhibit
D.
\366\ Prepared Statement of Gary Grippo and Ronald Backes, supra
note 26, at 6.
\367\ Treasury conversations with Panel staff (Sept. 16, 2010). For
a more complete discussion of Treasury's monitoring of contractor and
agent conflicts of interest, see Sections B.3 and H, supra.
---------------------------------------------------------------------------
2. Data Production and Verification
Some concerns have developed recently regarding the process
underlying Fannie Mae's data generation and how rigorously
Treasury is scrutinizing the HAMP data and metrics it receives
from its financial agent. Under the terms of its financial
agency agreement, Fannie Mae is required, among other tasks, to
``[p]rovide detailed loan level reporting, as required, to the
Treasury and the compliance agent.'' \368\ Starting in the June
2010 Making Home Affordable public report, Treasury has
included a table entitled ``Performance of Permanent
Modifications,'' which is produced by Fannie Mae and provides
information on the number of borrowers in delinquency or re-
default after their loans convert from trial modifications to
permanent modifications. This information is designed to inform
the public as to whether homeowners with HAMP modifications are
being placed into sustainable mortgages. Initially, Treasury
reported that just under 6 percent of HAMP homeowners were at
least 60 days late six months after their mortgages were
modified. After the June 2010 table was published, however,
analysts at Barclays Capital challenged the information
reported in the table.\369\ After Treasury and Fannie Mae
reviewed the data, they found that the default rate that Fannie
Mae provided in the original table appeared to be significantly
lower than the actual default rate as indicated by the source
data. The significant errors in the table were subsequently
attributed to logic errors in the Fannie Mae code used to
create the table.\370\ As a result, Treasury had to correct the
data and republish its June 2010 MHA report in early August
2010 after data validation efforts were undertaken by the MITRE
Corporation and an independent third party consultant
contracted by Fannie Mae's Internal Audit group.
---------------------------------------------------------------------------
\368\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit A.
\369\ MITRE HAMP Re-Default Report, supra note 194, at 2-1.
\370\ MITRE HAMP Re-Default Report, supra note 194, at 2-1.
---------------------------------------------------------------------------
The data error, which was highly visible and instrumental
from a public policy perspective, suggests that there was a
lack of adequate processes or systems in place (as well as
personnel) at Fannie Mae to detect any mistakes, omissions, or
discrepancies in data production, as well as insufficient
scrutiny, verification and validation by the Home Ownership
Preservation Office within Treasury of the HAMP data
compilations it was receiving from its financial agent.\371\
Treasury, with the support of FHFA, will require Fannie Mae to
pay for the data validation services provided by the MITRE
Corporation as a result of the data error.\372\ Fannie Mae and
Treasury express confidence that processes have been put in
place to make sure that such errors in the data collection and
generation cycle will not be repeated, and noted how the MITRE
Corporation's mandate has been broadened to analyze and
validate the data generation and production components of all
public HAMP reports.\373\
---------------------------------------------------------------------------
\371\ See MITRE, Home Affordable Modification Program: Assessment
of the HAMP July 2010 Public Report (Final) (Sept. 3, 2010)
(recommending that Treasury should engage in ``manual cross-checking
efforts'' to ``decrease the likelihood of errors.''). According to
Treasury officials, this occurrence demonstrated that Treasury lacked
adequate controls with respect to how program and financial agency
agreement requirements were being communicated from Treasury. In
addition, the data error also highlighted inadequate testing being done
by Fannie Mae and inadequate validation of that testing on the part of
Treasury. Treasury conversations with Panel staff (Sept. 23, 2010).
\372\ Treasury conversations with Panel staff (Sept. 23, 2010).
Since Fannie Mae is under conservatorship, however, ultimately the fees
will be paid for by taxpayers, regardless of whether Fannie Mae or
Treasury pays the fees to MITRE.
\373\ Treasury conversations with Panel staff (Sept. 23, 2010);
Testimony of Joy Cianci, supra note 274.
According to Ms. Cianci, immediately upon discovering the data
error, Fannie Mae notified Treasury and ``took upon a three-phased
remediation approach.'' The first phase focused on ``recoding and
validating a revised grid.'' Treasury engaged the MITRE Corporation to
``independently code and validate the grid,'' and ``Fannie Mae assigned
four independent teams to recode and revalidate the grid.'' The MITRE
Corporation ``expressed strong confidence to Treasury regarding the
revised table,'' resulting in the publication of the revised table on
August 6, 2010. Phase two focused on the internal audit and MITRE
Corporation performing a ``root cause analysis'' to help ``identify
some recommendations that would bolster controls regarding [Fannie
Mae's] production of data in support of the public report.'' Currently,
Fannie Mae is in the third phase which is focused on bolstering
internal controls.
---------------------------------------------------------------------------
The systems and resources that Treasury has committed to
monitoring the performance and compliance of the GSEs have
grown over time. In recent conversations with Treasury
officials, however, OFS and OFA officials readily admit that
Treasury lacked adequate controls with respect to the
communication of program requirements and the validation of
data.\374\ This admission, based upon the data error described
above, calls into question the level of independent scrutiny,
verification, and oversight that Treasury has done with respect
to the monitoring of its financial agents. While the Panel
recognizes and appreciates that Treasury has dedicated more
resources to the monitoring and oversight of the GSEs, proper
implementation of the TARP and oversight of financial agents
require rigorous monitoring and controls from the program's
inception.
---------------------------------------------------------------------------
\374\ Treasury conversations with Panel staff (Sept. 23, 2010).
---------------------------------------------------------------------------
G. Performance Assessment Made Challenging by Insufficient Reporting
Under the terms of its financial agency agreement and
responsibilities as HAMP compliance agent, Freddie Mac is
required, among other tasks, to ``conduct examinations and
review servicer compliance with the published rules for the
program and report results to the Treasury.'' \375\ Based upon
such examinations, Freddie is required to provide Treasury
``with advice, guidance, and lessons learned to improve
operation of the program.'' \376\
---------------------------------------------------------------------------
\375\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit A.
\376\ Financial Agency Agreement Between Treasury and Freddie Mac,
supra note 122, at Exhibit A.
---------------------------------------------------------------------------
In mid-2009, the OFS compliance department observed that
Freddie Mac (since the inception of HAMP) was having difficulty
meeting the deadlines of its planned audits and delivering key
compliance reports.\377\ After evaluating the first Servicer
Performance Reviews completed by Freddie Mac, OFS had several
other areas of concern, including the use of unqualified staff
to perform audits; inconsistent and incomplete audit
documentation; and overreliance on contractors to perform the
audits.\378\ These difficulties led Treasury to meet with
senior officials at Freddie Mac, develop a detailed remediation
plan addressing many aspects of Freddie Mac's contractual
obligations and place an OFS compliance official with Freddie
Mac full-time.\379\ According to Treasury, Freddie Mac was very
proactive in addressing these concerns and made some key
personnel changes to improve its compliance function, including
the hiring of Mr. Heran, program executive for Making Home
Affordable--Compliance, who came to Freddie Mac after a long
auditing career in the financial services industry.\380\ While
OFS compliance acted prudently in recognizing the deficiencies
at Freddie Mac early on and taking steps to remedy the
situation, and although it is possible that Freddie Mac has
completed all of the steps under its detailed remediation plan,
it is difficult to monitor progress on these issues without
additional information and more regular reporting.
---------------------------------------------------------------------------
\377\ July 2010 SIGTARP Report, supra note 299, at 102.
\378\ July 2010 SIGTARP Report, supra note 299, at 102.
\379\ July 2010 SIGTARP Report, supra note 299, at 102.
\380\ Treasury conversations with Panel staff (Sept. 23, 2010).
---------------------------------------------------------------------------
H. Evaluation of Transparency
Beginning with the release of its Making Home Affordable
Program Servicer Performance Report through May 2010, released
in June 2010, Treasury has included an appendix describing
Freddie Mac's compliance activities.\381\ The material in this
appendix has become boilerplate language that Treasury now
includes in each month's Servicer Performance Report. The
appendix describes the four major activities that comprise the
compliance program, including on-site reviews (to assess
readiness and governance as well as implementation), loan file
reviews, net present value (NPV) testing and assessments, and
incentive payment reviews.\382\ The appendix also discusses the
frequency with which Freddie Mac conducts its reviews for each
of the different types of compliance activities to assess
servicer compliance with HAMP guidelines. In addition, the
appendix discusses several areas of Freddie Mac's continued
compliance focus, including borrower solicitation, underwriting
documentation, NPV model usage, document processing and
control, data maintenance, and governance. While this
additional information is a step in the right direction with
respect to transparency, the Panel is disappointed that the
monthly MHA reports have offered little detail on Freddie Mac's
activities as HAMP compliance agent. While it takes time to
develop a large enough pool of servicer actions and trial
conversions for Freddie Mac to review, whether the process has
been aggressive, robust, and transparent enough remains
unclear. Preliminary compliance results would have been most
useful early in the life of HAMP in order to enable course
corrections and help homeowners before it is too late.
---------------------------------------------------------------------------
\381\ U.S. Department of the Treasury, Making Home Affordable
Program Servicer Performance Report Through May 2010, at 11 (June 21,
2010) (online at www.financialstability.gov/docs/
May%20MHA%20Public%20062110.pdf) (hereinafter ``Making Home Affordable
Program Servicer Performance Report Through May 2010'').
\382\ See generally, Id. at 11.
---------------------------------------------------------------------------
Additionally, the May 2010 Making Home Affordable Program
Servicer Performance Report marked the first occasion in which
Treasury released the results of MHA-C's compliance ``Second
Look'' reviews (detailing the December 2009 rotation for
``Second Look'' reviews).\383\ Treasury again released this
information in its August 2010 Making Home Affordable Program
Servicer Performance Report (detailing the first quarter 2010
rotation for ``Second Look'' reviews).\384\ Going forward,
Treasury plans to make this information available on a monthly
basis. According to Treasury, the reason why information on
other compliance activities has not been made publicly
available is because the ``Second Look'' compliance activities
lend themselves to be given out in a benchmark manner, and
other compliance activities do not.\385\ Going forward,
however, Treasury plans to continue to consult with MHA-C in
efforts to determine what other types of compliance-related
information can be made public and improve transparency.
---------------------------------------------------------------------------
\383\ Id. at 6. This information demonstrated that MHA-C disagreed
with the servicers' actions in 3.9 percent of the cases it evaluated.
\384\ Servicer Performance Report through August 2010, supra note
336, at 11. This information demonstrated that MHA-C disagreed with the
servicers' actions in an average of 4.8 percent of the cases it
evaluated.
\385\ Treasury conversations with Panel staff (Sept. 27, 2010).
---------------------------------------------------------------------------
The Panel has long been concerned about Treasury's data
collection efforts under HAMP. In all of the Panel's prior
reports on Treasury's foreclosure mitigation efforts, the Panel
has expressly called for the collection of more data and
greater public disclosure.\386\ Treasury relies on Fannie Mae
to act as record keeper for executed loan modifications and
program administration. In this capacity, Fannie Mae is the
primary collector of and gatekeeper for all information related
to HAMP, including basic information such as the number of
modifications, the rate of conversions from trial to permanent
modifications, and the reasons for borrower failure. Such
exclusive reliance creates significant risks to both effective
program implementation and financial agent oversight.
---------------------------------------------------------------------------
\386\ April 2010 Oversight Report, supra note 3; October 2009
Oversight Report, supra note 3; March 2009 Oversight Report, supra note
3.
---------------------------------------------------------------------------
In prior reports the Panel has noted the importance of a
strong accountability regime and public disclosure to the
credibility and effectiveness of HAMP.\387\ Treasury should
publicly release more data collected by Fannie Mae and Freddie
Mac so that Congress, the TARP oversight bodies, and the public
can better evaluate the effectiveness of HAMP. Review and
analysis of the substantial amount of data being collected by
Fannie Mae as program administrator and Freddie Mac as
compliance agent are important in understanding the strengths
and weaknesses of HAMP as well as particular areas in need of
improvement. Because of Fannie Mae and Freddie Mac's crucial
roles in administering and enforcing HAMP requirements, it is
especially important that Treasury release data on the
compliance audits done by Freddie Mac to show whether servicers
are properly following HAMP guidelines or whether Treasury and
Freddie Mac are ensuring that HAMP requirements are being
enforced. Taxpayers should be able to see the consequences that
result both from HAMP compliance and non-compliance.\388\
---------------------------------------------------------------------------
\387\ April 2010 Oversight Report, supra note 3, at 5; October 2009
Oversight Report, supra note 3, at 5.
\388\ April 2010 Oversight Report, supra note 3, at 9.
---------------------------------------------------------------------------
I. Conclusion
The Panel is very concerned that, over 19 months into its
financial agency agreements with Fannie Mae and Freddie Mac,
Treasury's expectations for them in their respective roles of
financial agent/HAMP administrator and financial agent/
compliance agent remain unclear. The Panel has previously
called on Treasury to ``clearly define and communicate its
goals and requirements as well as its measurements for success.
Without clear goals and measurements, Treasury and its agents
and third parties (for example, oversight bodies, Congress, and
the public) will not be able to evaluate the adequacy or
success of its programs overall or of individual
participants.'' \389\ Not only has Treasury failed to
articulate specific goals for the program, but the concerns
raised in the discussion above suggest that Fannie Mae and
Freddie Mac are not performing satisfactorily under their
financial agency agreements. In addition, OFS has yet to
develop written procedures for the oversight and monitoring of
Fannie Mae and Freddie Mac's administrative and compliance
activities, including internal controls over the existence,
completeness and accuracy of data formulation and input.\390\
As GAO noted recently, ``[w]ithout clearly documented guidance
regarding the specific procedures OFS should follow to
effectively oversee and monitor Fannie Mae and Freddie Mac, OFS
faces an increased risk that the financial information related
to HAMP may not be complete or correct, and OFS management's
ability to identify key risks in this area may also be
impaired.'' \391\ It is exactly requirements such as these that
Treasury should explicitly include in all procurements and
financial agency agreements. Accordingly, GAO has recommended
that OFS develop and implement written procedures detailing
steps to be performed in overseeing and monitoring Fannie Mae
and Freddie Mac.\392\
---------------------------------------------------------------------------
\389\ April 2010 Oversight Report, supra note 3, at 86.
\390\ According to documentation from Treasury, drafted ``Program
Implementation Guidelines'' guidance for the Financial Agency
Agreements for Fannie Mae and Freddie Mac are currently in final review
with Fannie Mae, Freddie Mac, and their regulator, FHFA.
\391\ June 2010 GAO Report on Internal Control Over Financial
Reporting, supra note 257, at 13.
\392\ June 2010 GAO Report on Internal Control Over Financial
Reporting, supra note 257, at 14.
---------------------------------------------------------------------------
There are several important lessons that can be learned
from analyzing Fannie Mae and Freddie Mac's roles as financial
agents of Treasury.
First, the lack of clarity surrounding Treasury's
decision to select Fannie Mae and Freddie Mac suggests that
Treasury should better explain its rationale and decision-
making process behind choosing to enter into contracts or
financial agency agreements with institutions that have been
bailed out or are likely to be bailed out. Since Fannie Mae and
Freddie Mac do not have a proven track record of success with
respect to running their own businesses (as demonstrated by
their being placed into conservatorship in September 2008),
Treasury had, and has, an obligation to explain why it believes
they would, and will, be successful with the administration and
compliance enforcement of the $30 billion TARP-funded HAMP.
Their selection without extensive consideration of alternative
options has led inevitably to concerns as to whether their
selection was part of an overall government rescue of the GSEs,
and was not driven by concerns for the effectiveness of HAMP.
Second, the recent data error by Fannie Mae
indicates that Treasury was not sufficiently cognizant of the
importance of clear communication and robust monitoring and
supervision of performance and compliance as it developed and
implemented large scale programs under the TARP like HAMP,
particularly early on in the process.
Third, the credibility and effectiveness of HAMP
is undermined in the absence of sufficient and regular public
disclosure of compliance and enforcement activities conducted
by Treasury's contractors and financial agents. In order for
compliance and enforcement to function as a deterrence
mechanism and be exercised effectively, they must be
sufficiently robust and transparent.
ANNEX II: TABLES
FIGURE 10: LIST OF PROCUREMENT CONTRACTS DETAILING VALUES UNDER THE CONTRACT \393\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Adjusted
Performance Obligated Potential Type of Vehicle
Contract Number Contractor Description Date of Award End Date Value Expended Value Contract Value \395\ Contract Type
\394\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOFS-10-D-0005............ Alston & Bird LLP... Omnibus procurement 8/6/2010 8/5/2015 $0 $0 $99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOFS-09-D-0010............ Anderson McCoy & Legal services for 5/26/2009 11/24/2010 4,068,834 1,577,271 15,000,000 TODC Fixed Price Time and
Orta. work under Materials or Labor
Treasury's Public Hour
Private Investment
Funds (PPIF)
program.
TOFS-10-O-0007............ Association of CEAR Program 1/15/2010 1/14/2011 5,000 5,000 5,000 DC Fixed Price
Government Application.
Accountants.
TOFS-09-D-0005............ Bingham McCutchen SBA Initiative Legal 3/30/2009 9/29/2010 422,355 270,776 1,850,651 TODC Fixed Price or Time
LLP. Services--Contract and Materials
Novated from TOFS-
09-D-0005 with
McKee Nelson.
TOFS-10-O-0021............ Bingham McCutchen SBA 7(a) Security 9/17/2010 12/31/2010 19,975 0 19,975 DC Time and Materials
LLP. Purchase Program.
TOFS-09-D-0006............ Cadwalader Auto Investment 3/30/2009 8/31/2010 17,482,165 17,392,786 26,756,322 TODC Fixed Price or Time
Wickersham & Taft Legal Services. and Materials
LLP.
TOFS-09-D-0011............ Cadwalader Restructuring Legal 7/30/2009 1/6/2011 2,049,979 1,266,342 20,687,500 TODC Fixed Price or Time
Wickersham & Taft Services. and Materials
LLP.
TOS09-020................. Cadwalader Bankruptcy Legal 1/27/2009 7/20/2009 409,955 409,955 409,955 DC Labor Hour
Wickersham & Taft Services.
LLP.
TOFS-10-D-0006............ Cadwalader Omnibus procurement 8/6/2010 8/5/2015 1,997,820 0 99,791,842 TODC Fixed Price, Labor
Wickersham & Taft for legal services. Hour or Time and
LLP. Materials
TOFS-10-G-0008............ CCH Incorporated.... GSA Task Order for 9/30/2010 10/30/2010 2,430 0 2,430 DC Fixed Price
procurement books--
FAR, T&M,
Government
Contracts
Reference, World
Class Contracting.
TOS09-017................. Colonial Parking Lease of parking 1/7/2009 9/30/2013 191,650 111,320 566,050 DC Fixed Price
Inc.. spaces.
TOFS-10-O-0020............ CQ-Roll Call Inc.... One year 9/1/2010 7/7/2011 7,500 7,500 7,500 DC Fixed Price
subscription (3
users) to the CQ
Today Breaking News
& Schedules, CQ
Congressional &
Financial
Transcripts, CQ
Custom Email Alerts.
TOS09-016................. Cushman & Wakefield Painting Services 12/24/2008 1/3/2009 8,750 8,750 8,750 DC Fixed Price
of VA Inc.. for TARP Offices.
TOFS-10-D-0019............ Davis Audrey Program Operations 9/27/2010 9/23/2015 50,000 0 6,000,000 TODC Fixed Price or Labor
Robinette. Support Services to Hour
include project
management,
scanning and
document management
and correspondence.
TOFS-09-D-0012............ Debevoise & Restructuring Legal 7/30/2009 1/28/2011 159,175 0 20,687,500 TODC Fixed Price or Time
Plimpton, LLP. Services. and Materials
TOFS-10-B-0003............ Digital Management Data and Document 4/22/2010 4/20/2015 0 0 100,000,000 TODC Fixed Price, Labor
Inc.. Management Hour, or Time and
Consulting Services. Materials
TOFS-10-D-0004............ Ennis Knupp & Investment 4/12/2010 4/11/2015 83,050 82,050 6,000,000 TODC Fixed Price, Time
Associates Inc.. Consulting Services. and Materials, or
Labor Hour
TOS-09-008................ Ennis Knupp & Investment and 10/11/2008 4/10/2010 2,715,965 2,392,742 2,495,190 TODC Fixed Price Level of
Associates Inc.. Advisory Services. Effort
TOFS-09-O-0013............ Equilar Inc......... Executive 9/10/2009 9/10/2010 59,990 59,990 59,990 DC Fixed Price
Compensation Data
Subscription.
T2009-TARP-0002........... Ernst & Young LLP... Accounting Services. 10/18/2008 9/30/2011 11,397,968 10,710,092 11,397,968 TODC Fixed Price or Time
and Materials
TOFS-10-B-0007............ Ernst & Young LLP... Program Compliance 7/22/2010 7/19/2015 0 0 21,993,424 TODC Fixed Price or Labor
Support Services. Hour
TOFS-09-B-0001............ FI Consulting Inc... Credit Reform 3/31/2009 3/30/2014 1,935,866 1,461,560 1,935,866 TODC Labor Hour
Modeling and
Analysis.
TOFS-09-D-0013............ Fox Hefter Swibel Restructuring Legal 7/30/2009 1/28/2011 84,125 0 20,687,500 TODC Fixed Price or Time
Levin & Carol, LLP. Services. and Materials
TOFS-10-D-0007............ Fox Hefter Swibel Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Levin & Carol, LLP. for legal services. Hour or Time and
Materials
TOFS-09-D-0007............ Haynes and Boone LLP Auto Investment 3/30/2009 3/10/2010 345,746 345,746 26,756,322 TODC Fixed Price or Time
Legal Services. and Materials
TOFS-10-D-0008............ Haynes and Boone LLP Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOFS-09-O-0003............ Herman Miller Inc... Aeron Chairs........ 4/17/2009 5/31/2009 53,799 53,799 53,799 DC Fixed Price
T09BPA-002................ Hughes Hubbard & Legal services for 10/29/2008 10/31/2010 3,060,921 2,828,688 5,645,162 TODC Fixed Price or Time
Reed LLP. the Capital and Materials
Purchase Program.
TOFS-10-B-0001............ Hughes Hubbard & Document Production 12/22/2009 12/22/2014 601,890 601,890 13,464,607 TODC Fixed Price or Labor
Reed LLP. services and Hour
Litigation Support.
TOFS-10-D-0009............ Hughes Hubbard & Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Reed LLP. for legal services. Hour or Time and
Materials
TOFS-09-O-0012............ Knowledge Mosaic SEC filings 9/2/2009 8/31/2010 5,000 5,000 5,000 DC Fixed Price
Inc.. subscription
service.
TDO10-F-249............... Knowledge Mosaic SEC filings 8/12/2010 8/31/2011 5,000 5,000 5,000 DC Fixed Price
Inc.. subscription
service.
TOFS-09-G-0002............ Korn/Ferry Executive search 7/17/2009 10/15/2009 75,017 75,017 75,017 DC Fixed Price
International. services for the
OFS Chief
Investment Officer
position.
TDO-TARP-2009-0003........ Lindholm & Human resources 10/31/2008 9/30/2010 751,302 614,963 710,528 DC Labor Hour
Associates Inc. services.
TDOX09-0040............... Locke Lord Bissell & Initiate Interim 2/12/2009 8/11/2009 272,243 272,243 2,000,000 DC Labor Hour
Liddell LLP. Legal Services in
support of Treasury
Investments under
EESA.
TOFS-10-D-0010............ Love & Long LLP..... Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOFS-09-O-0011............ Mercer (US) Inc..... Executive 8/18/2009 8/18/2010 3,000 3,000 3,000 DC Fixed Price
Compensation Data
Subscription.
TOFS-10-B-0004............ Microlink LLC....... Data and Document 4/22/2010 4/20/2015 1,665,160 615,150 100,000,000 TODC Fixed Price, Labor
Management Hour, or Time and
Consulting Services. Materials
TOFS-10-B-0008............ Navigant Consulting Program Compliance 7/21/2010 7/19/2015 0 0 21,993,424 TODC Fixed Price and
Inc. Support Services. Labor Hour
TOFS-10-O-0001............ NNA Inc............. Newspaper delivery.. 9/30/2009 9/30/2010 8,479 8,220 7,765 DC Fixed Price
TOFS-10-D-0011............ Orrick Herrington Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Sutcliffe LLP. for legal services. Hour, or Time and
Materials
TDOX09-0039............... Pat Taylor and Temporary Services 2/9/2009 1/5/2010 692,108 692,108 692,108 DC Labor Hour
Associates, Inc. for Document
Production, FOIA
Assistance, and
Program Support.
TOFS-10-D-0012............ Paul Weiss Rifkind Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Wharton & Garrison for legal services. Hour, or Time and
LLP. Materials
TOFS-10-D-0013............ Perkins Coie LLP.... Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOS-07-109................ Phacil, Inc......... Freedom of 5/15/2009 9/12/2009 103,425 90,301 103,425 Task Order Fixed Price
Information Act
(FOIA) Analysts to
support the
Disclosure
Services, Privacy
and Treasury
Records.
T2009-TARP-0001........... PricewaterhouseCoope Internal control 10/16/2008 9/30/2011 24,541,437 22,410,694 25,361,407 TODC Time and Materials
rs LLP. services.
TOFS-09-B-0002............ PricewaterhouseCoope PPIP compliance..... 9/11/2009 9/10/2014 1,240,037 1,114,937 2,897,400 TODC Labor Hour
rs LLP.
TOFS-10-B-0009............ PricewaterhouseCoope Program Compliance 7/22/2010 7/19/2015 0 0 21,993,424 TODC Fixed Price and
rs LLP. Support Services. Labor Hour
TOFS-10-D-0003............ Qualx Corporation... FOIA Support 3/8/2010 3/8/2015 230,438 192,032 14,000,000 TODC Fixed Price
Services.
TOFS-10-B-0005............ RDA Corporation..... Data and Document 4/23/2010 7/8/2015 1,277,134 393,861 100,000,000 TODC Fixed Price, Labor
Management Hour, or Time and
Consulting Services. Materials
TOFS-10-G-0005............ Reed Elselvier Inc. Accurint 6/24/2010 6/30/2011 8,208 1,539 8,208 DC Fixed Price
(dba LexisNexis). subscription
services for one
year--4 users.
TOFS-10-B-0010............ Regis & Associates, Program Compliance 7/21/2010 7/19/2015 0 0 21,993,424 TODC Fixed Price and
PC. Support Services. Labor Hour
TOFS-10-G-0007............ Schiff Hardin LLP... Housing Legal 7/22/2010 7/21/2011 537,375 87,464 537,375 DC Labor Hour
Services.
TOFS-10-D-0014............ Seyfarth Shaw LLP... Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOFS-10-D-0015............ Shulman Rogers Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Gandal Pordy & for legal services. Hour, or Time and
Ecker PA. Materials
TOFS-09-D-0001............ Simpson Thacher & Capital Assistance 2/20/2009 10/31/2009 2,047,872 1,363,085 5,000,000 TODC Fixed Price or Labor
Bartlett LLP. Program (I). Hour
TOFS-09-D-0009............ Simpson Thacher & Legal services for 5/26/2009 5/24/2011 7,849,026 3,185,439 15,000,000 TODC Fixed Price or Labor
Bartlett LLP. work under Hour
Treasury's Public
Private Investment
Funds (PPIF)
program.
TOS09-007................. Simpson Thacher & Legal services for 10/10/2008 4/9/2009 931,090 931,090 1,025,000 TODC Fixed Price or Time
Bartlett LLP. the implementation and Materials
of TARP.
TOFS-09-O-0016............ SNL Financial LC.... SNL Unlimited, a web- 9/30/2009 9/29/2012 260,000 110,000 460,000 DC Fixed Price
based financial
analytics service.
TOFS-09-D-0004............ Sonnenschein Nath & Auto Investment 3/30/2009 3/30/2010 1,834,193 1,834,193 26,756,322 TODC Fixed Price or Time
Rosenthal LLP. Legal services. and Materials
TOS09-010A................ Sonnenschein Nath & Legal services 11/7/2008 5/31/2009 2,722,326 2,722,326 233,663 DC Labor Hour
Rosenthal LLP. related to auto
industry loans.
TOS09-014C................ Sonnenschein Nath & Legal Services for 12/10/2008 6/9/2009 249,999 82,884 249,999 TODC Fixed Price or Time
Rosenthal LLP. the purchase of and Materials
asset backed
securities.
T09BPA-001................ Squire Sanders & Legal services for 10/29/2008 7/31/2010 5,787,939 2,687,999 5,520,000 TODC Fixed Price or Time
Dempsey LLP. the Capital and Materials
Purchase Program.
TOFS-10-B-0002............ Squire Sanders & Housing Legal 4/8/2010 4/7/2011 1,229,350 572,956 1,229,350 TODC Fixed Price or Labor
Dempsey LLP. Services. Hour
TOFS-10-D-0016............ Sullivan Cove Reign Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
Enterprises JV. for legal services. Hour, or Time and
Materials
TOFS-09-D-0003............ The Boston Management 3/6/2009 9/5/2009 991,169 991,169 1,000,000 TODC Labor Hour
Consulting Group Consulting relating
Inc. to the Auto
industry.
TOFS-09-D-0008............ The Boston Management 4/3/2009 9/30/2010 4,100,195 4,099,923 7,000,000 TODC Fixed Price or Labor
Consulting Group Consulting relating Hour
Inc. to the Auto
industry.
TOFS-10-O-0017............ The George Financial 6/30/2010 8/14/2010 5,000 5,000 5,000 DC Fixed Price
Washington Institution Mgmt &
University. Modeling--Training
course (J.Talley).
TOFS-10-I-0001............ The Mitre FNMA IR2 Assessment-- 2/16/2010 10/31/2010 740,526 656,276 740,526 DC Cost Plus Fixed Fee
Corporation. OFS task order on
Treasury Mitre
Contract.
TOFS-09-D-0002............ Venable LLP......... Capital Assistance 2/20/2009 2/19/2010 1,394,724 1,394,724 5,000,000 TODC Fixed Price or Labor
Program (II) Legal Hour
Services.
TOFS-10-D-0017............ Venable LLP......... Omnibus procurement 8/6/2010 8/5/2015 0 0 99,791,842 TODC Fixed Price, Labor
for legal services. Hour, or Time and
Materials
TOFS-10-G-0006............ West Publishing Subscription Service 7/27/2010 7/31/2011 5,972 747 5,972 DC Fixed Price
Corporation. for 4 users.
TDOX09-0038............... Whitaker Brothers Paper Shredder...... 1/27/2009 2/26/2009 3,213 3,213 3,213 DC Fixed Price
Bus Machines Inc.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\393\ Treasury documents provided to Panel staff (Oct. 8, 2010).
\394\ Adjusted Potential Contract Value includes amounts from the base contract, task orders, and modifications.
\395\ Adjusted Potential Contract Value includes amounts from the base contract, task orders, and modifications. A ``TDOC'' is a Task or Delivery Order Contract, while a ``DC'' is a Definitive
Contract.
FIGURE 11: LIST OF PROCUREMENT CONTRACTS DETAILING COMPETITION AND SOCIOECONOMIC STATUS OF CONTRACTORS \396\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Original Adjusted
Potential Potential Socio- economic
Contract Number Contractor Description Contract Value Contract Value Competition Status Offerors Solicited Proposals Received Program
\397\ \398\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOFS-10-D-0005 Alston & Bird LLP.. Omnibus procurement $99,791,842 $99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
for legal services. Small Business Set-
aside.
TOFS-09-D-0010 Anderson McCoy & Legal services for 15,000,000 15,000,000 Limited Small Business.... 8................. 3................. PPIP
Orta. work under Competition--Unusu
Treasury's Public al and Compelling
Private Investment Urgency.
Funds (PPIF)
program.
TOFS-10-O-0007 Association of CEAR Program 5,000 5,000 Sole Source--Only Large Business.... 1................. 1................. Program Operations
Government Application. Responsible Source.
Accountants.
TOFS-09-D--0005 Bingham McCutchen SBA Initiative 1,850,651 1,850,651 Limited Large Business.... Novation.......... Novation.......... SBA
LLP. Legal Services-- Competition--Unusu
Contract Novated al and Compelling
from TOFS-09-D- Urgency.
0005 with McKee
Nelson.
TOFS-10-O-0021 Bingham McCutchen SBA 7(a) Security 19,975 19,975 SAP--Competed...... Large Business.... .................. 3................. SBA
LLP. Purchase Program.
TOFS-09-D-0006 Cadwalader Auto Investment 8,590,000 26,756,322 Limited Large Business.... 8................. 6................. Auto Industry
Wickersham & Taft Legal Services. Competition--Unusu
LLP. al and Compelling
Urgency.
TOFS-09-D-0011 Cadwalader Restructuring Legal 20,687,500 20,687,500 Limited Large Business.... 10................ 5................. Multiple Programs
Wickersham & Taft Services. Competition--Unusu
LLP. al and Compelling
Urgency.
TOS09-020 Cadwalader Bankruptcy Legal 417,563 409,955 Limited Large Business.... 3................. 3................. Auto Industry
Wickersham & Taft Services. Competition--Unusu
LLP. al and Compelling
Urgency.
TOFS-10-D-0006 Cadwalader Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Wickersham & Taft for legal services. Small Business Set-
LLP. aside.
TOFS-10-G-0008 CCH Incorporated... GSA Task Order for 2,430 2,430 SAP--Not Competed.. Large Business.... 1................. 1................. Program Operations
procurement books--
FAR, T&M,
Government
Contracts
Reference, World
Class Contracting.
TOS09-017 Colonial Parking Lease of parking 566,050 566,050 Full and Open...... Large Business.... Full and Open .................. Program Operations
Inc. spaces. Competition.
TOFS-10-O-0020 CQ-Roll Call Inc... One year 7,500 7,500 SAP--Not Competed.. Large Business.... 1................. 1................. HPO
subscription (3
users) to the CQ
Today Breaking
News & Schedules,
CQ Congressional &
Financial
Transcripts, CQ
Custom Email
Alerts.
TOS09-016 Cushman & Wakefield Painting Services 8,750 8,750 Full and Open...... Large Business.... 1................. 1................. Program Operations
of VA Inc. for TARP Offices.
TOFS-10-D-0019 Davis Audrey Program Operations 6,000,000 6,000,000 Full and Open after Woman and Minority .................. .................. Multiple Programs
Robinette. Support Services Exclusion of Owned Small
to include project Sources (Total SB business.
management, set-aside).
scanning and
document
management and
correspondence.
TOFS-09-D-0012 Debevoise & Restructuring Legal 20,687,500 20,687,500 Limited Large Business.... 10................ 5................. Multiple Programs
Plimpton, LLP. Services. Competition--Unusu
al and Compelling
Urgency.
TOFS-10-B-0003 Digital Management Data and Document 100,000,000 100,000,000 GSA Schedule Small Business.... 10................ 5................. Program Operations
Inc.. Management Competition.
Consulting
Services.
TOFS-10-D-0004 Ennis Knupp & Investment 6,000,000 6,000,000 Full and Open...... Large Business.... .................. .................. Multiple Programs
Associates Inc. Consulting
Services.
TOS-09-008 Ennis Knupp & Investment and 2,495,190 2,495,190 Limited Large Business.... 6................. 3................. Multiple Programs
Associates Inc. Advisory Services. Competition--Unusu
al and Compelling
Urgency.
TOFS-09-O-0013 Equilar Inc........ Executive 59,990 59,990 Full and Open...... Large Business.... Full and Open..... 1................. Multiple Programs
Compensation Data
Subscription.
T2009-TARP-0002 Ernst & Young LLP.. Accounting Services 0 11,397,968 GSA Schedule Large Business.... 7................. 6................. Multiple Programs
Competition.
TOFS-10-B-0007 Ernst & Young LLP.. Program Compliance 21,993,424 21,993,424 GSA Schedule Large Business.... .................. .................. Multiple Programs
Support Services. Competition.
TOFS-09-B-0001 FI Consulting Inc.. Credit Reform 0 1,935,866 GSA Schedule Small Business.... 6................. 2................. Multiple Programs
Modeling and Competition.
Analysis.
TOFS-09-D-0013 Fox Hefter Swibel Restructuring Legal 20,687,500 20,687,500 Limited Large Business.... 10................ 5................. Multiple Programs
Levin & Carol, LLP. Services. Competition--Unusu
al and Compelling
Urgency.
TOFS-10-D-0007 Fox Hefter Swibel Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Levin & Carol, LLP. for legal services. Small Business Set-
aside.
TOFS-09-D-0007 Haynes and Boone Auto Investment 8,590,000 26,756,322 Limited Large Business.... 8................. 6................. Auto Industry
LLP. Legal Services. Competition--Unusu
al and Compelling
Urgency.
TOFS-10-D-0008 Haynes and Boone Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
LLP. for legal services. Small Business Set-
aside.
TOFS-09-O-0003 Herman Miller Inc.. Aeron Chairs....... 53,799 53,799 GSA Schedule Large Business.... .................. GSA Competition... Program Operations
Competition.
T09BPA-002 Hughes Hubbard & Legal services for 5,645,162 5,645,162 GSA Schedule Large Business.... 5................. 4................. CPP
Reed LLP. the Capital Competition.
Purchase Program.
TOFS-10-B-0001 Hughes Hubbard & Document Production 13,464,607 13,464,607 GSA Schedule Large Business.... 5................. 3................. Multiple Programs
Reed LLP. services and Competition.
Litigation Support.
TOFS-10-D-0009 Hughes Hubbard & Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Reed LLP. for legal services. Small Business Set-
aside.
TOFS-09-O-0012 Knowledge Mosaic SEC filings 5,000 5,000 Full and Open...... Large Business.... 3................. 3................. Multiple Programs
Inc. subscription
service.
TDO10-F-249 Knowledge Mosaic SEC filings 5,000 5,000 Sole Source--Only Large Business.... 1................. 1................. Multiple Programs
Inc. subscription Responsible Source.
service.
TOFS-09-G-0002 Korn/Ferry Executive search 75,017 75,017 GSA Schedule Large Business.... 4................. 4................. Program Operations
International. services for the Competition.
OFS Chief
Investment Officer
position.
TDO-TARP-2009-000 Lindholm & Human resources 710,528 710,528 GSA Schedule Woman Owned Small 4................. 3................. Program Operations
3 Associates Inc. services. Competition. Business.
TDOX09-0040 Locke Lord Bissell Initiate Interim 2,000,000 2,000,000 Limited Large Business.... 3................. 3................. Multiple Programs
& Liddell LLP. Legal Services in Competition--Unusu
support of al and Compelling
Treasury Urgency.
Investments under
EESA.
TOFS-10-D-0010 Love & Long LLP.... Omnibus procurement 99,791,842 99,791,842 Full and Open w/ SDB Woman Owned .................. 81................ Multiple Programs
for legal services. Small Business Set- Small Business.
aside.
TOFS-09-O-0011 Mercer (US) Inc.... Executive 3,000 3,000 Full and Open...... Large Business.... 3................. 1................. Multiple Programs
Compensation Data
Subscription.
TOFS-10-B-0004 Microlink LLC...... Data and Document 100,000,000 100,000,000 GSA Schedule Large Business.... 10................ 5................. Program Operations
Management Competition.
Consulting
Services.
TOFS-10-B-0008 Navigant Consulting Program Compliance 21,993,424 21,993,424 GSA Schedule Large Business.... 9................. 6................. Multiple Programs
Inc. Support Services. Competition.
TOFS-10-O-0001 NNA Inc............ Newspaper delivery. 7,765 7,765 Full and Open...... Large Business.... Full and Open 1................. Program Operations
Competition.
TOFS-10-D-0011 Orrick Herrington Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Sutcliffe LLP. for legal services. Small Business Set-
aside.
TDOX09-0039 Pat Taylor and Temporary Services 461,956 692,108 GSA Schedule Woman Owned Small 3................. 3................. Multiple Programs
Associates, Inc. for Document Competition. Business.
Production, FOIA
Assistance, and
Program Support.
TOFS-10-D-0012 Paul Weiss Rifkind Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Wharton & Garrison for legal services. Small Business Set-
LLP. aside.
TOFS-10-D-0013 Perkins Coie LLP... Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
for legal services. Small Business Set-
aside.
TOS-07-109 Phacil, Inc........ Freedom of 103,425 103,425 Full and Open...... Small Business.... .................. .................. Program Operations
Information Act
(FOIA) Analysts to
support the
Disclosure
Services, Privacy
and Treasury
Records.
T2009-TARP-0001 PricewaterhouseCoop Internal control 0 25,361,407 GSA Schedule Large Business.... 6................. 6................. Multiple Programs
ers LLP. services. Competition.
TOFS-09-B-0002 PricewaterhouseCoop PPIP compliance.... 2,897,400 2,897,400 GSA Schedule Large Business.... 7................. 4................. PPIP
ers LLP. Competition.
TOFS-10-B-0009 PricewaterhouseCoop Program Compliance 21,993,424 21,993,424 GSA Schedule Large Business.... 9................. 6................. Multiple Programs
ers LLP. Support Services. Competition.
TOFS-10-D-0003 Qualx Corporation.. FOIA Support 14,000,000 14,000,000 Full and Open...... Service Disabled Unlimited to 15................ Program Operations
Services. Veteran Owned SDVOSB vendors.
Small Business.
TOFS-10-B-0005 RDA Corporation.... Data and Document 100,000,000 100,000,000 GSA Schedule Small Business.... 10................ 5................. Program Operations
Management Competition.
Consulting
Services.
TOFS-10-G-0005 Reed Elselvier Inc. Accurint 8,208 8,208 GSA Schedule Large Business.... 4................. 1................. ..................
(dba LexisNexis). subscription Competition.
services for one
year--4 users.
TOFS-10-B-0010 Regis & Associates, Program Compliance 21,993,424 21,993,424 GSA Schedule 8(a) and Small 9................. 6................. Multiple Programs
PC. Support Services. Competition. Disadvantaged
Business.
TOFS-10-G-0007 Schiff Hardin LLP.. Housing Legal 537,375 537,375 GSA Schedule Large Business.... .................. .................. HAMP
Services. Competition.
TOFS-10-D-0014 Seyfarth Shaw LLP.. Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
for legal services. Small Business Set-
aside.
TOFS-10-D-0015 Shulman Rogers Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
Gandal Pordy & for legal services. Small Business Set-
Ecker PA. aside.
TOFS-09-D-0001 Simpson Thacher & Capital Assistance 5,000,000 5,000,000 Limited Large Business.... 6................. 3................. Multiple Programs
Bartlett LLP. Program (I). Competition--Unusu
al and Compelling
Urgency.
TOFS-09-D-0009 Simpson Thacher & Legal services for 15,000,000 15,000,000 Limited Large Business.... 8................. 3................. Multiple Programs
Bartlett LLP. work under Competition--Unusu
Treasury's Public al and Compelling
Private Investment Urgency.
Funds (PPIF)
program.
TOS09-007 Simpson Thacher & Legal services for 500,000 1,025,000 GSA Schedule Large Business.... 6................. 2................. Multiple Programs
Bartlett LLP. the implementation Competition.
of TARP.
TOFS-09-O-0016 SNL Financial LC... SNL Unlimited, a 460,000 460,000 Full and Open...... Large Business.... Full and Open..... 3................. Multiple Programs
web-based
financial
analytics service.
TOFS-09-D-0004 Sonnenschein Nath & Auto Investment 8,590,000 26,756,322 Limited Large Business.... 8................. 6................. Auto Industry
Rosenthal LLP. Legal services. Competition--Unusu
al and Compelling
Urgency.
TOS09-010A Sonnenschein Nath & Legal services 233,663 233,663 Limited Large Business.... 4................. 4................. Auto Industry
Rosenthal LLP. related to auto Competition--Unusu
industry loans. al and Compelling
Urgency.
TOS09-014C Sonnenschein Nath & Legal Services for 249,999 249,999 Limited Large Business.... 7................. 6................. CPP
Rosenthal LLP. the purchase of Competition--Unusu
asset backed al and Compelling
securities. Urgency.
T09BPA-001 Squire Sanders & Legal services for 5,520,000 5,520,000 GSA Schedule Large Business.... 5................. 4................. CPP
Dempsey LLP. the Capital Competition.
Purchase Program.
TOFS-10-B-0002 Squire Sanders & Housing Legal 1,229,350 1,229,350 GSA Schedule Large Business.... 5................. 2................. HAMP
Dempsey LLP. Services. Competition.
TOFS-10-D-0016 Sullivan Cove Reign Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Service Disabled .................. 81................ Multiple Programs
Enterprises JV. for legal services. Small Business Set- Veteran Owned
aside. Small Business.
TOFS-09-D-0003 The Boston Management 1,000,000 1,000,000 Limited Large Business.... 5................. 3................. Auto Industry
Consulting Group Consulting Competition--Unusu
Inc. relating to the al and Compelling
Auto industry. Urgency.
TOFS-09-D-0008 The Boston Management 7,000,000 7,000,000 Limited Large Business.... 7................. 5................. Auto Industry
Consulting Group Consulting Competition--Unusu
Inc. relating to the al and Compelling
Auto industry. Urgency.
TOFS-10-O-0017 The George Financial 5,000 5,000 SAP--Competed...... Large Business.... .................. 1................. ..................
Washington Institution Mgmt &
University. Modeling--Training
course (J. Talley).
TOFS-10-I-0001 The Mitre FNMA IR2 408,075 740,526 Sole Source--Only Large Business.... 1................. 1................. HAMP
Corporation. Assessment--OFS Responsible Source.
task order on
Treasury Mitre
Contract.
TOFS-09-D-0002 Venable LLP........ Capital Assistance 5,000,000 5,000,000 Limited Large Business.... 6................. 3................. Multiple Programs
Program (II) Legal Competition--Unusu
Services. al and Compelling
Urgency.
TOFS-10-D-0017 Venable LLP........ Omnibus procurement 99,791,842 99,791,842 Full and Open w/ Large Business.... .................. 81................ Multiple Programs
for legal services. Small Business Set-
aside.
TOFS-10-G-0006 West Publishing Subscription 5,972 5,972 GSA Schedule Large Business.... .................. .................. Anti-Fraud
Corporation. Service for 4 Competition.
users.
TDOX09-0038 Whitaker Brothers Paper Shredder..... 3,213 3,213 GSA Schedule--Sole Small Business.... 1................. 1................. Program Operations
Bus Machines Inc. Source.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\396\ Treasury documents provided to Panel staff (Oct. 8, 2010).
\397\ Original Potential Contract Value is the amount listed in the base contract.
\398\ Adjusted Potential Contract Value includes amounts from the base contract, task orders and modifications.
FIGURE 12: LIST OF SUBCONTRACTS UNDER THE PROCUREMENT CONTRACTS \399\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Subcontract Socioeconomic
Contract Number Contractor Subcontractor Name Value Status Category Program
--------------------------------------------------------------------------------------------------------------------------------------------------------
TOFS-09-D-0010................. Anderson McCoy & Cadwalader $3,940,925 Large Business.... Legal Advisory.... PPIP
Orta. Wickersham & Taft
LLP.
TOFS-09-D-0006................. Cadwalader Driven............ 15,452 Small Business.... Legal Advisory.... Auto Industry
Wickersham & Taft
LLP.
TOS-09-008..................... Ennis Knupp & Korn Ferry........ 375,000 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & Spencer Stuart.... 275,000 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & FirstAdvantage.... 117,500 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & Bishops Services.. 19,850 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & Delves Group...... 26,000 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & FedEx-Courier..... 58 Large Business.... Financial Advisory Multiple Programs
Associates Inc.
TOS-09-008..................... Ennis Knupp & ABS-IT services 7,000 Woman Owned Small Financial Advisory Multiple Programs
Associates Inc. (2%). Business.
TOS-09-008..................... Ennis Knupp & Vedder Price-Legal 2,106 Small Business.... Financial Advisory Multiple Programs
Associates Inc.
T2009-TARP-0002................ Ernst & Young LLP. Emax Financial.... 358,300 Woman and Minority Accounting/ Multiple Programs
Owned Small Internal Controls.
Business.
T2009-TARP-0002................ Ernst & Young LLP. James K Hess...... 303,880 Small Business.... Accounting/ Multiple Programs
Internal Controls.
T2009-TARP-0002................ Ernst & Young LLP. Morgan Franklin... 814,984 Large Business.... Accounting/ Multiple Programs
Internal Controls.
T2009-TARP-0002................ Ernst & Young LLP. R Moran Co........ 19,291 Service Disabled Accounting/ Multiple Programs
Veteran Owned Internal Controls.
Small Business.
T2009-TARP-0002................ Ernst & Young LLP. Misha Libman...... 194,508 Small Business.... Accounting/ Multiple Programs
Internal Controls.
T2009-TARP-0002................ Ernst & Young LLP. T Curtis Co....... 1,082,558 Woman and Minority Accounting/ Multiple Programs
Owned Small Internal Controls.
Business.
T2009-TARP-0002................ Ernst & Young LLP. Peggy Kuhn........ 108,000 Woman Owned Small Accounting/ Multiple Programs
Business. Internal Controls.
T2009-TARP-0002................ Ernst & Young LLP. Tom Horton........ 18,750 Small Business.... Accounting/ Multiple Programs
Internal Controls.
T2009-TARP-0002................ Ernst & Young LLP. Lani Ecko......... 60,939 Small Accounting/ Multiple Programs
Disadvantaged Internal Controls.
Business.
TOFS-09-B-0001................. FI Consulting Inc. Internet Security 17,241 Small Business.... Accounting/ Multiple Programs
Corp. Internal Controls.
T09BPA-002..................... Hughes Hubbard & Leftwich & 158,835 Woman Owned Small Legal Advisory.... CPP
Reed LLP. Ludaway, LLC. Business.
TOFS-09-D-0005................. McKee Nelson LLP.. American Detail 500 Small Business.... Legal Advisory.... SBA
Cleaning Corp.
TOFS-09-D-0005................. McKee Nelson LLP.. Document 3,100 Large Business.... Legal Advisory.... SBA
Technologies,
Inc..
TOFS-09-D-0005................. McKee Nelson LLP.. Great Performances 400 Woman Owned Small Legal Advisory.... SBA
Business.
TOFS-09-D-0005................. McKee Nelson LLP.. Merrill 2,600 Large Business.... Legal Advisory.... SBA
Communications
LLC.
TOFS-09-D-0005................. McKee Nelson LLP.. Miller's Office 1,200 Woman Owned Small Legal Advisory.... SBA
Products. Business.
TOFS-09-D-0005................. McKee Nelson LLP.. Total Document 2,100 Woman Owned Small Legal Advisory.... SBA
Solutions, Inc.. Business.
TOFS-09-D-0005................. McKee Nelson LLP.. Washington Express 100 Small Business.... Legal Advisory.... SBA
TOFS-10-B-0004................. Microlink LLC..... I3 Solutions...... 65,520 Small Business.... Information Program Operations
Technology.
T2009-TARP-0001................ PricewaterhouseCoo A11 Services 3,025 Woman Owned Small Accounting/ Multiple Programs
pers LLP. Corporation. business. Internal Controls.
T2009-TARP-0001................ PricewaterhouseCoo Bert Smith........ 324,904 Large Business.... Accounting/ Multiple Programs
pers LLP. Internal Controls.
T2009-TARP-0001................ PricewaterhouseCoo DP George......... 168,552 Service Disabled Accounting/ Multiple Programs
pers LLP. Veteran Owned Internal Controls.
Small Business.
T2009-TARP-0001................ PricewaterhouseCoo Evergreen 65,230 Woman Owned Small Accounting/ Multiple Programs
pers LLP. Associates of Business. Internal Controls.
Virginia.
T2009-TARP-0001................ PricewaterhouseCoo GRC Assurance..... 326,565 Small Business.... Accounting/ Multiple Programs
pers LLP. Internal Controls.
T2009-TARP-0001................ PricewaterhouseCoo JH2 Risk Advisors. 422,499 Woman Owned Small Accounting/ Multiple Programs
pers LLP. Disadvantaged Internal Controls.
Business.
T2009-TARP-0001................ PricewaterhouseCoo Synergy Services.. 1,617,819 Woman Owned Small Accounting/ Multiple Programs
pers LLP. Business. Internal Controls.
TOFS-10-D-0003................. Qualx Corporation. McNeil 103,000 Large Business.... Administrative Program Operations
Technologies. Support.
TOFS-09-D-0008................. The Boston Oxnard MB LLC..... 25,437 Small Business.... Financial Advisory Auto Industry
Consulting Group
Inc..
TOFS-09-D-0008................. The Boston PR & Associates... 113,544 Small Business.... Financial Advisory Auto Industry
Consulting Group
Inc..
TOFS-09-D-0002................. Venable LLP....... Brown Sheehan LLP. 130,429 Small Legal Advisory.... CAP
Disadvantaged
Business.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\399\ Treasury documents provided to Panel staff (Oct. 8, 2010).
FIGURE 13: LIST OF FINANCIAL AGENCY AGREEMENTS \400\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Financial Agency Performance Socio- economic
Agreement Number Financial Agent Description Date of Award End Date Obligated Value Expended Value Category \401\ Program
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOFA-09-FAA-0005.......... AllianceBernstein Asset Management 4/21/2009 4/20/2018 $22,399,943 $21,207,253 Large Business....... Multiple Programs
L.P.. Services.
TOFA-10-FAA-0001.......... Avondale Investments, Asset Management 12/22/2009 4/20/2019 750,000 562,500 Minority Owned CPP
LLC. Services. Business.
TOFA-09-FAA-0001.......... The Bank of New York Custodian............ 10/14/2008 10/14/2015 28,495,412 23,777,002 Large Business....... Multiple Programs
Mellon Corporation.
TOFA-10-FAA-0002.......... Bell Rock Capital, Asset Management 12/22/2009 4/20/2019 750,000 575,000 Woman Owned Business. CPP
LLC. Services.
TOFA-09-FAA-0004.......... Earnest Partners..... Asset Management 3/16/2009 3/15/2013 4,050,000 1,955,000 Minority Owned SBA7(a)
Services. Business.
TOFA-09-FAA-0002.......... Fannie Mae........... HAMP Administration.. 2/18/2009 2/17/2019 126,712,000 111,339,451 Large Business....... HAMP
TOFA-09-FAA-0003.......... Freddie Mac.......... HAMP Compliance...... 2/18/2009 2/17/2019 88,850,000 79,296,499 Large Business....... HAMP
TOFA-09-FAA-0006.......... FSI Group LLC........ Asset Management 4/21/2009 4/20/2018 11,102,500 10,770,000 Large Business....... Multiple Programs
Services.
TOFA-10-FAA-0003.......... Howe Barnes Hoefer & Asset Management 12/22/2009 4/20/2019 1,250,000 950,000 Small Business....... CPP
Arnett, Inc.. Services.
TOFA-10-FAA-0004.......... KBW Asset Management, Asset Management 12/22/2009 4/20/2019 3,803,333 3,279,167 Small Business....... Multiple Programs
Inc.. Services.
TOFA-10-FAA-0009.......... Lazard Freres & Co. Transaction 5/17/2010 2/16/2012 7,500,000 2,166,667 Large Business....... AIFP
LLC. Structuring.
TOFA-10-FAA-0005.......... Lombardia Capital Asset Management 12/22/2009 4/20/2019 1,250,000 937,500 Minority Owned CPP
Partners, LLC. Services. Business.
TOFA-10-FAA-0008.......... Morgan Stanley & Co.. Disposition Services. 3/29/2010 3/29/2012 23,577,000 13,175,423 Large Business....... CPP
TOFA-10-FAA-0006.......... Paradigm Asset Asset Management 12/22/2009 4/20/2019 1,250,000 925,000 Minority Owned CPP
Management Co., LLC. Services. Business.
TOFA-09-FAA-0007.......... Piedmont Investment Asset Management 4/21/2009 4/20/2018 5,615,000 5,120,000 Minority Owned CPP
Advisors LLC. Services. Business.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\400\ Treasury documents provided to Panel staff (Oct. 8, 2010).
\401\ Treasury documents provided to Panel staff (Oct. 5, 2010).
FIGURE 14: LIST OF SUBCONTRACTS UNDER FINANCIAL AGENT AGREEMENTS \402\
----------------------------------------------------------------------------------------------------------------
Reported
Financial Agent Contractor Socioeconomic Contract Category
Status Value \403\
----------------------------------------------------------------------------------------------------------------
AllianceBernstein.............. Altura Capital Group Minority and Woman $816,664 Financial Advisory
LLC. Owned Business. Services
AllianceBernstein.............. Deutsche Bank Large Business.... 250,000 Financial Advisory
Securities Inc.. Services
AllianceBernstein.............. Jeremy Bulow, Jon Large Business.... 48,920 Financial Advisory
Levin, Paul Milgrom Services
and Paul Klemperer.
The Bank of New York Mellon.... American Cybersystems.. Minority Owned 80,168 Temporary Staffing
Business. Services
The Bank of New York Mellon.... Diversant, Inc......... Minority Owned 539,371 Temporary Staffing
Business. Services
The Bank of New York Mellon.... Foxx-Pitt Kelton....... Large Business.... 1,175,000 Financial Advisory
Services
The Bank of New York Mellon.... Gifford Fong Associates Small Business.... 268,828 Financial Advisory
Services
The Bank of New York Mellon.... Information Integration Woman Owned 275,501 Technical Writing
Inc. (I-3). Business. Support
The Bank of New York Mellon.... International Market Large Business.... 67,793 Temporary Staffing
Recruiters. Services
The Bank of New York Mellon.... New York Staffing Minority Owned 256,257 Temporary Staffing
Services, Inc.. Business. Services
The Bank of New York Mellon.... RangeMark (f/k/a Small Business.... 3,738,524 Financial Advisory
Structured Credit Services
Solutions (NSM)).
The Bank of New York Mellon.... Robert Jarrow.......... Small Business.... 30,987 Financial Advisory
Services
The Bank of New York Mellon.... TTI of New York, Inc... Woman Owned 31,163 Temporary Staffing
Business. Services
The Bank of New York Mellon.... Williams, Adley & Minority and Woman 276,227 Audit and
Company, LLP. Owned Business. Accounting
Services
The Bank of New York Mellon.... Wilshire Associates Large Business.... 1,223,750 Portfolio
Incorporated. Analystic
Services
Fannie Mae \404\............... Accenture.............. Large Business.... 4,587,626 Project Management
& Reporting
Support
Fannie Mae..................... Beers & Cutler......... Large Business.... 103,225 Business Process
Support
Fannie Mae..................... Bloomfield Knoble, Inc. Large Business.... 100,310 Web Development
Support
Fannie Mae..................... Cap Gemini............. Large Business.... 154,307 Records Retention
Support
Fannie Mae..................... Ernst & Young LLP...... Large Business.... 3,777,188 Business Process
Support
Fannie Mae..................... Homeownership Small Business.... 8,049,969 Call Center
Preservation Support
Foundation.
Fannie Mae..................... Iron Mountain.......... Large Business.... 7,141 Data Storage
Services
Fannie Mae..................... LPS/McDash............. Large Business.... 6,117,500 Data Management
Services
Fannie Mae..................... Newbold, LLC........... Small Business.... 204,057 Project Management
Support
Fannie Mae..................... Pace Harmon, LLC....... Small Business.... 82,094 Call Center
Support
Fannie Mae..................... PERC................... Large Business.... 135,927 Information
Protection
Support
Fannie Mae..................... PricewaterhouseCoopers Large Business.... 3,371,008 Phone Bank Support
LLP.
Fannie Mae..................... Robbins Gioia.......... Minority Owned 349,619 MHA Operating
Business. Model Support
Fannie Mae..................... The Ad Council......... Large Business.... 1,042,716 Marketing Support
Fannie Mae..................... The Oakleaf Group LLC.. Small Business.... 842,967 Program Support
(Reporting)
Freddie Mac.................... AllonHill, LLC......... Woman Owned 4,442,955 Program Support
Business.
Freddie Mac.................... American Research Large Business.... 269,019 Training Support
Institute.
Freddie Mac.................... Celerity IT, LLC....... Large Business.... 23,364 Staff Augmentation
Freddie Mac.................... Clayton Holdings....... Large Business.... 3,864,205 Compliance Support
(File Reviews)
Freddie Mac.................... Collaberra............. Minority Owned 409,240 Professional
Business. Training
Freddie Mac.................... Comsys Info Tech Large Business.... 450,509 Staff Augmentation
Services, Inc..
Freddie Mac.................... Edge Professional Large Business.... 437,968 Staff Augmentation
Services.
Freddie Mac.................... Ernst & Young LLP...... Large Business.... 17,761,258 Business Process
Support
Freddie Mac.................... Esolution First, LLC... Woman Owned 997,566 Staff Augmentation
Business.
Freddie Mac.................... Grant Thornton......... Large Business.... 1,115,161 Governance Audit
Support
Freddie Mac.................... Helen Thompson......... Woman Owned 171,100 Training Support
Business.
Freddie Mac.................... Idea Integration....... Large Business.... 57,295 IT Support
Services
Freddie Mac.................... Inscope Solutions...... Minority Owned 982,193 Project Management
Business. Support
Freddie Mac.................... Kforce................. .................. 87,360 Staff Augmentation
Freddie Mac.................... Lender Processing Large Business.... 1,458,143 Compliance Program
Services. Support
Freddie Mac.................... MODIS, Inc............. Large Business.... 435,253 Project Management
Support
Freddie Mac.................... Mortgage Analytics & Woman Owned 10,983 Financial Support
Consulting. Business. Services
Freddie Mac.................... Oliver Wyman........... Large Business.... 5,930,308 Data Validation
Support
Freddie Mac.................... Pace Harmon, LLC....... Large Business.... 466,830 Procurement
Support
Freddie Mac.................... Protiviti.............. Large Business.... 28,341 Governance Audit
Support
Freddie Mac.................... Sapphire Government Large Business.... 301,577 Staff Augmentation
Technologies.
Freddie Mac.................... Spectrum Technology Large Business.... 1,130,031 IT Support
Services. Services
Freddie Mac.................... Syapps................. Minority Owned 1,223,175 IT Support
Business. Services
Freddie Mac.................... VisionIT............... Minority Owned 52,848 Staff Augmentation
Business.
Freddie Mac.................... Williams, Adley & Minority and Woman 933,231 Governance Audit
Company, LLP. Owned Business. Support
Freddie Mac.................... Willmott & Associates.. Large Business.... 200,875 Recruitment
Support
FSI Group...................... Elizabeth Park Capital Minority Owned 106,250 Recruitment
Management, Ltd.. Business. Support
Piedmont Investment Advisors... N/A \405\.............. Small Business.... 320,000 Financial Advisory
Services
----------------------------------------------------------------------------------------------------------------
\402\ Data on contractors to financial agents is current through August 31, 2010. Reports are based on
representations by the financial agents, as Treasury does not have contractual privity with contractors to
financial agents. Treasury documents provided to Panel staff (Oct. 8, 2010).
\403\ Contract value refers to the amount payable from the agent to the contractor. Not all contractor costs are
compensated by Treasury on a pass-through basis.
\404\ Fannie Mae also engages numerous marketing, site hosting and IT vendors that are not individually reported
on an due to the quantity of these contractors, their low average dollar-value and that the associated costs
of these contracts are included in the fixed fee we pay Fannie Mae under their FAA with the Treasury.
\405\ This subcontractor was a sole proprietor and Treasury requested that the name be withheld.
SECTION TWO: TARP UPDATES SINCE LAST REPORT
A. Community Development Capital Initiative
Treasury completed funding for the Community Development
Capital Initiative (CDCI) on September 30, 2010. Although
Treasury committed to spend up to $780 million in TARP funds
for the CDCI, only $570 million was allocated to 84 Community
Development Financial Institutions (CDFIs). Among these
institutions were 28 banks and thrifts that issued preferred
shares through CPP and later exchanged these securities for an
equivalent investment amount under the CDCI. The number of
participating CDFIs grew more than six times in September, with
73 banks, thrifts, and credit unions entering the program. More
than half of the final investment amount ($312 million) came
during the final round of funding on September 29 and 30, 2010.
B. Citigroup AGP TruPS and Common Stock Sales
On September 30, 2010, Treasury completed a third round of
sales for Citigroup common stock, which it received in July
2009 as part of an exchange for preferred shares issued under
CPP. A total of 1.5 billion shares were sold between July 30
and September 30, 2010, at $3.91 per share. Gross proceeds from
the three disposition periods completed thus far total $16.4
billion. Approximately $13.4 billion of this amount represents
a repayment for Citigroup's CPP funding, while the remaining $3
billion represents a net profit for taxpayers. Treasury still
holds 3.1 billion common shares, which represents 12.4 percent
of Citigroup's outstanding common equity.
Treasury also completed a public offering for $2.2 billion
in trust preferred securities (TruPS) issued under the Asset
Guarantee Program (AGP). These securities were a premium for
Treasury's $5 billion guarantee on a $301 billion pool of
Citigroup ring-fenced assets. Treasury initially received a $4
billion premium; however, $1.8 billion was cancelled upon the
December 2009 termination of the guarantee. All proceeds from
the TruPS sale constitute further profits for taxpayers since
Treasury did not make any payments associated with the loss-
share agreement during the life of the program.
Treasury also plans to sell $800 million in AGP TruPS
currently held by the FDIC. The FDIC will transfer these
securities to Treasury upon Citigroup's exit from the Temporary
Liquidity Guarantee Program (TLGP), provided that there are no
losses from the company's participation in TLGP.
C. AIG Repayment Plan
On September 30, 2010, American International Group Inc.
(AIG) announced that it had entered an agreement-in-principle
with Treasury, the Federal Reserve Bank of New York (FRBNY),
and the AIG Credit Facility Trust that would allow the company
to repay its outstanding obligations to the federal government.
AIG's repayment plan involves three components:
AIG will repay its balance on the revolving
credit facility (RCF) with FRBNY. As of September 29, 2010, the
amount of funds outstanding from the facility was $18.9
billion. To repay the RCF, AIG plans to use proceeds from the
initial public offering for American International Assurance
Company Ltd. (AIA) and the pending sale of American Life
Insurance Company (ALICO) to MetLife, Inc. AIG will also use
funds from the parent company to pay down and, ultimately,
terminate the facility.
AIG will draw down up to $22.3 billion in Series
F funds available through the TARP to help purchase FRBNY's
$25.7 billion preferred equity interests in the AIA Aurora LLC
and ALICO Holdings LLC special purpose vehicles (SPVs). The
company will also use proceeds from two future asset sales (AIG
Star Life Insurance Co. and AIG Edison Life Insurance) to
purchase the remaining shares held in the SPVs. AIG will then
transfer the preferred interests to Treasury as part of its
consideration for the Series F preferred shares. In order to
repay Treasury for the equity interest in the SPVs, AIG will
use proceeds from future sales of AIA and MetLife equity, which
AIG will own upon completion of the ALICO sale.
Upon full repayment of the RCF, AIG will issue
approximately 1.655 billion shares of common stock to Treasury
in exchange for $49.1 billion of Series E and Series F
preferred equity issued under the TARP and Series C preferred
convertible stock held by the AIG Credit Facility Trust. AIG
will also issue up to 75 million warrants for common equity to
all existing common shareholders. Once the exchange is
complete, Treasury will have a 92.1 percent common equity stake
in AIG.
D. FHA Short Refinance Program
On September 7, 2010, the U.S. Department of Housing and
Urban Development (HUD) began offering an additional refinance
option for borrowers in negative equity positions through the
Federal Housing Administration (FHA) Short Refinance Program.
For a homeowner to qualify for a new FHA-insured loan under the
program, the borrower must be current on their mortgage
payments, and the first-lien mortgage holder must write down at
least 10 percent of the loan's principal. The loan-to-value
ratio can be no higher than 97.75 percent after the
refinancing, and the combined loan-to-value ratio on the
refinanced mortgage (which would also include any junior liens)
can be no greater than 115 percent.
Treasury has allocated approximately $3 billion in TARP
funds for this program to support existing second-lien holders
who agree to full or partial extinguishment of the liens.
On September 3, 2010, Treasury purchased an $8 billion, 10-
year letter of credit facility from Citibank, N.A. to cover
losses on new FHA loans. Treasury will incrementally increase
the amount available under the facility in proportion to the
dollar value of mortgages refinanced under the FHA Short
Refinance Program. After the first two-and-a-half years, the
amount available under the credit facility will be capped at
the level of draws up to that point in time. As part of the
purchase agreement with Citibank, N.A., Treasury will pay up to
$117 million in fees for the availability and usage of the
credit facility.
E. Treasury Releases Two-Year Retrospective Report on the TARP
Two days following the expiration of the TARP on October 3,
2010, Treasury released a Two-Year Retrospective report
assessing the program. The report cites a number of key
accomplishments Treasury attributes to the TARP. Treasury also
estimates that the total cost of the TARP will be $51 billion.
The total cost to Treasury would be $29 billion after factoring
in an estimated profit of $22 billion associated with its
investments in AIG outside of the TARP. Treasury expects most
of the residual cost to come from losses from the TARP's
investments in the automotive industry as well as expenditures
for foreclosure mitigation initiatives.
F. Metrics
Each month, the Panel's report highlights a number of
metrics that the Panel and others, including Treasury, the
Government Accountability Office (GAO), the Special Inspector
General for the Troubled Asset Relief Program (SIGTARP), and
the Financial Stability Oversight Board, consider useful in
assessing the effectiveness of the Administration's efforts to
restore financial stability and accomplish the goals of EESA.
This section discusses changes that have occurred in several
indicators since the release of the Panel's September report.
1. Macroeconomic Indices
Real GDP growth quarter-over-quarter peaked at an annual
rate of 5 percent in the fourth quarter of 2009 and has
decreased during 2010. Real GDP increased at rates of 3.7 and
1.6 percent in the first and second quarters of 2010,
respectively.\406\ These growth rates were also affected by the
spike in employment resulting from the 2010 U.S. Census.\407\
---------------------------------------------------------------------------
\406\ Bureau of Economic Analysis, Table 1.1.6.: Real Gross
Domestic Product, Chained Dollars (online at www.bea.gov/national/
nipaweb/TableView.asp?SelectedTable=6&Freq=Qtr&
FirstYear=2008&LastYear=2010) (hereinafter ``Bureau of Economic
Analysis, Table 1.1.6''). Until the year-over-year decrease from 2007
to 2008, nominal GDP had not decreased on an annual basis since 1949.
Bureau of Economic Analysis, Table 1.1.5.: Gross Domestic Product
(online at www.bea.gov/national/nipaweb/
TableView.asp?SelectedTable=5&Freq=Qtr&FirstYear=2008&LastYear=2010)
(accessed Oct. 12, 2010).
\407\ The Economics and Statistics Administration within the U.S.
Department of Commerce estimated that the spending associated with the
2010 Census would peak in the second quarter of 2010 and could boost
annualized nominal and real GDP growth by 0.1 percentage point in the
first quarter of 2010 and 0.2 percentage point in the second quarter of
2010. As the boost from the Census is a one-time occurrence, continuing
increases in private investment and personal consumption expenditures
as well as in exports will be needed to sustain the resumption of
growth that has occurred in the U.S. economy over the past year.
Economics and Statistics Administration, U.S. Department of Commerce,
The Impact of the 2010 Census Operations on Jobs and Economic Growth,
at 8 (Feb. 2010) (online at www.esa.doc.gov/02182010.pdf).
---------------------------------------------------------------------------
FIGURE 15: REAL GDP \408\
---------------------------------------------------------------------------
\408\ Bureau of Economic Analysis, Table 1.1.6, supra note 406.
[GRAPHIC] [TIFF OMITTED] 61540A.001
Since our September report, both underemployment and
unemployment have increased marginally. Median duration of
unemployment has decreased by 10 percent.
FIGURE 16: UNEMPLOYMENT, UNDEREMPLOYMENT, AND MEDIAN DURATION OF
UNEMPLOYMENT \409\
---------------------------------------------------------------------------
\409\ It is important to note that the measures of unemployment and
underemployment do not include people who have stopped actively looking
for work altogether. While the Bureau of Labor Statistics (BLS) does
not have a distinct metric for ``underemployment,'' the U-6 category of
Table A-15 ``Alternative Measures of Labor Underutilization'' is used
here as a proxy. BLS defines this measure as: ``Total unemployed, plus
all persons marginally attached to the labor force, plus total employed
part time for economic reasons, as a percent of the civilian labor
force plus all persons marginally attached to the labor force.'' U.S.
Department of Labor, International Comparisons of Annual Labor Force
Statistics (online at www.bls.gov/webapps/legacy/cpsatab15.htm)
(accessed Oct. 12, 2010).
[GRAPHIC] [TIFF OMITTED] 61540A.002
2. Financial Indices
a. Overview
Since its post-crisis trough in April 2010, the St. Louis
Federal Reserve Financial Stress Index has increased over
elevenfold, although it has fallen by nearly half since the
post-crisis peak in June 2010. The recent trend suggests that
financial stress continues moving towards its long-run norm.
The index has decreased over three standard deviations since
October 2008, the month when the TARP was initiated.
FIGURE 17: ST. LOUIS FEDERAL RESERVE FINANCIAL STRESS INDEX \410\
---------------------------------------------------------------------------
\410\ Federal Reserve Bank of St. Louis, Series STLFSI: Business/
Fiscal: Other Economic Indicators (Instrument: St. Louis Financial
Stress Index, Frequency: Weekly) (online at research.stlouisfed.org/
fred2/categories/98) (accessed Oct. 12, 2010). The index includes 18
weekly data series, beginning in December 1993 to the present. The
series are: effective federal funds rate, 2-year Treasury, 10-year
Treasury, 30-year Treasury, Baa-rated corporate, Merrill Lynch High
Yield Corporate Master II Index, Merrill Lynch Asset-Backed Master BBB-
rated, 10-year Treasury minus 3-month Treasury, Corporate Baa-rated
bond minus 10-year Treasury, Merrill Lynch High Yield Corporate Master
II Index minus 10-year Treasury, 3-month LIBOR-OIS spread, 3-month TED
spread, 3-month commercial paper minus 3-month Treasury, the J.P.
Morgan Emerging Markets Bond Index Plus, Chicago Board Options Exchange
Market Volatility Index, Merrill Lynch Bond Market Volatility Index (1-
month), 10-year nominal Treasury yield minus 10-year Treasury Inflation
Protected Security yield, and Vanguard Financials Exchange-Traded Fund
(equities). The index is constructed using principal components
analysis after the data series are de-meaned and divided by their
respective standard deviations to make them comparable units. The
standard deviation of the index is set to 1. For more details on the
construction of this index, see Federal Reserve Bank of St. Louis,
National Economic Trends Appendix: The St. Louis Fed's Financial Stress
Index (Jan. 2010) (online at research.stlouisfed.org/publications/net/
NETJan2010Appendix.pdf).
[GRAPHIC] [TIFF OMITTED] 61540A.003
Volatility has decreased recently. The Chicago Board
Options Exchange Volatility Index (VIX) has fallen about half
since the post-crisis peak in May 2010 and has fallen nearly 15
percent since its slightly elevated level in August. However,
volatility is still nearly 50 percent higher than its post-
crisis low on April 12, 2010.
FIGURE 18: CHICAGO BOARD OPTIONS EXCHANGE VOLATILITY INDEX \411\
---------------------------------------------------------------------------
\411\ Data accessed through Bloomberg data service on October 4,
2010. The CBOE VIX is a key measure of market expectations of near-term
volatility. CBOE, The CBOE Volatility Index--VIX 2009 (online at
www.cboe.com/micro/vix/vixwhite.pdf) (accessed Oct. 12, 2010).
[GRAPHIC] [TIFF OMITTED] 61540A.004
b. Interest Rates, Spreads, and Issuance
As of October 4, 2010, the 3-Month and 1-Month London
Interbank Offer Rates (LIBOR), the prices at which banks lend
and borrow from each other, were 0.291 and 0.257, respectively.
Rates have fallen by nearly half since post-crisis highs in
June 2010 and have remained nearly constant since our September
report. Over the longer term, however, interest rates remain
extremely low relative to pre-crisis levels.\412\
---------------------------------------------------------------------------
\412\ Data accessed through Bloomberg data service on October 4,
2010.
FIGURE 19: 3-MONTH AND 1-MONTH LIBOR RATES (AS OF OCTOBER 6, 2010)
----------------------------------------------------------------------------------------------------------------
Current Rates (as of 10/ Percent Change from Data Available
Indicator 4/2010) at Time of Last Report (9/6/2010)
----------------------------------------------------------------------------------------------------------------
3-Month LIBOR \413\................................ 0.291 (0.01)%
1-Month LIBOR \414\................................ 0.257 (0.00)%
----------------------------------------------------------------------------------------------------------------
\413\ Data accessed through Bloomberg data service on October 4, 2010.
\414\ Data accessed through Bloomberg data service on October 4, 2010.
However, in spite of extremely low interest rates, the non-
Agency U.S. mortgage-backed securities (MBS) market remains
moribund, with August issuance below $1 billion, and a 77-
percent decrease in issuance year to date between 2010 and
2009.\415\
---------------------------------------------------------------------------
\415\ SIFMA, US Mortgage-Related Securities Issuance (online at
www.sifma.org/uploadedFiles/Research/Statistics/
SIFMA_USMortgageRelatedIssuance.xls) (accessed Oct. 7, 2010).
---------------------------------------------------------------------------
Since the Panel's September report, interest rate spreads
have stayed fairly constant. Thirty-year mortgage interest
rates and 10-year Treasury bond yields have both remained
relatively unchanged as well. The conventional mortgage spread,
which measures the 30-year fixed mortgage rate over 10-year
Treasury bond yields, has risen very slightly since late
August.\416\
---------------------------------------------------------------------------
\416\ Board of Governors of the Federal Reserve System, Federal
Reserve Statistical Release H.15: Selected Interest Rates: Historical
Data (Instrument: Conventional Mortgages, Frequency: Weekly) (online at
www.federalreserve.gov/releases/h15/data/Weekly_Thursday_/
H15_MORTG_NA.txt) (accessed Oct. 5, 2010) (hereinafter ``Federal
Reserve Statistical Release H.15'').
---------------------------------------------------------------------------
The TED spread, which serves as an indicator for perceived
risk in the financial markets, has been falling since June, and
is currently lower than pre-crisis levels.\417\ The LIBOR-OIS
spread reflects the health of the banking system. While it
increased over threefold from early April to July, it has been
falling since mid-July and is now averaging pre-crisis
levels.\418\ Decreases in the LIBOR-OIS spread and the TED
spread suggest that hesitation among banks to lend to
counterparties has recently declined.
---------------------------------------------------------------------------
\417\ Federal Reserve Bank of Minneapolis, Measuring Perceived
Risk--The TED Spread (Dec. 2008) (online at www.minneapolisfed.org/
publications_papers/pub_display.cfm?id=4120).
\418\ Data accessed through Bloomberg data service on Oct. 5, 2010.
---------------------------------------------------------------------------
FIGURE 20: TED SPREAD \419\
---------------------------------------------------------------------------
\419\ Data accessed through Bloomberg data service on Oct. 4, 2010.
[GRAPHIC] [TIFF OMITTED] 61540A.005
FIGURE 21: LIBOR-OIS SPREAD \420\
---------------------------------------------------------------------------
\420\ Data accessed through Bloomberg data service on Oct. 4, 2010.
[GRAPHIC] [TIFF OMITTED] 61540A.006
The interest rate spread for AA asset-backed commercial
paper, which is considered mid-investment grade, has fallen by
about 4 percent since the Panel's September report. The
interest rate spread on A2/P2 commercial paper, a lower grade
investment than AA asset-backed commercial paper, has fallen by
nearly 6 percent since the Panel's September report. This
indicates healthier fundraising conditions.
FIGURE 22: INTEREST RATE SPREADS
------------------------------------------------------------------------
Percent Change
Current Spread Since Last
Indicator (as of 9/30/ Report (9/2/
2010) 2010)
(Percent)
------------------------------------------------------------------------
Conventional mortgage rate spread \421\ 1.8 4.0
(percentage points)....................
TED spread (basis points)............... 13.06 (15.4)
Overnight AA asset-backed commercial 0.08 (4.1)
paper interest rate spread \422\
(percentage points)....................
Overnight A2/P2 nonfinancial commercial 0.16 (6.2)
paper interest rate spread \423\
(percentage points)....................
------------------------------------------------------------------------
\421\ Federal Reserve Statistical Release H.15, supra note 416; Board of
Governors of the Federal Reserve System, Federal Reserve Statistical
Release H.15: Selected Interest Rates: Historical Data (Instrument:
U.S. Government Securities/Treasury Constant Maturities/Nominal 10-
Year, Frequency: Weekly) (online at www.federalreserve.gov/releases/
h15/data/Weekly_Friday_/H15_TCMNOM_Y10.txt) (accessed Oct. 5, 2010).
\422\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: AA Asset-Backed Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Oct. 5, 2010); Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release:
Commercial Paper Rates and Outstandings: Data Download Program
(Instrument: AA Nonfinancial Discount Rate, Frequency: Daily) (online
at www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP) (accessed
Oct. 5, 2010). In order to provide a more complete comparison, this
metric utilizes the average of the interest rate spread for the last
five days of the month.
\423\ Board of Governors of the Federal Reserve System, Federal Reserve
Statistical Release: Commercial Paper Rates and Outstandings: Data
Download Program (Instrument: A2/P2 Nonfinancial Discount Rate,
Frequency: Daily) (online at www.federalreserve.gov/DataDownload/
Choose.aspx?rel=CP) (accessed Oct. 5, 2010). In order to provide a
more complete comparison, this metric utilizes the average of the
interest rate spread for the last five days of the month.
The spread between Moody's Baa Corporate Bond Yield Index
and 30-year constant maturity U.S. Treasury Bond yields doubled
from late April to mid-June. The spread has leveled-off since a
spike in mid-June to its current level of approximately 2
percent. This spread indicates the difference in perceived risk
between corporate and government bonds, and a declining spread
could indicate waning concerns about the riskiness of corporate
bonds.
FIGURE 23: MOODY'S BAA CORPORATE BOND INDEX AND 30-YEAR U.S. TREASURY
BOND YIELD \424\
---------------------------------------------------------------------------
\424\ Federal Reserve Bank of St. Louis, Series DGS30: Selected
Interest Rates (Instrument: 30-Year Treasury Constant Maturity Rate,
Frequency: Daily) (online at research.stlouisfed.org/fred2/) (accessed
Oct. 5, 2010) (hereinafter ``Series DGS30: Selected Interest Rates'').
Corporate Baa rate data accessed through Bloomberg data service on Oct.
5, 2010.
[GRAPHIC] [TIFF OMITTED] 61540A.007
Corporate bond market issuance data corroborate this
analysis, with a near doubling in fixed-rate callable issuance
between July and August 2010.\425\
---------------------------------------------------------------------------
\425\ SIFMA, US Corporate Bond Issuance (online at www.sifma.org/
uploadedFiles/Research/Statistics/SIFMA_USCorporateBondIssuance.xls)
(accessed Oct. 7, 2010).
---------------------------------------------------------------------------
c. Condition of the Banks
Since the Panel's last report, 11 additional banks have
failed, with an approximate total asset value of $2.5 billion.
The number of failures from January through August 2010 has
nearly reached the level for all of calendar year 2009. In
general, banks failing in 2009 and 2010 have been small and
medium-sized institutions; while they are failing in high
numbers, their aggregate asset size has been relatively small.
FIGURE 24: BANK FAILURES AS A PERCENTAGE OF TOTAL BANKS AND BANK
FAILURES BY TOTAL ASSETS (1990-2010) \426\
---------------------------------------------------------------------------
\426\ The disparity between the number of and total assets of
failed banks in 2008 is driven primarily by the failure of Washington
Mutual Bank, which held $307 billion in assets. The 2010 year-to-date
percentage of bank failures includes failures through August. The total
number of FDIC-insured institutions as of March 31, 2010, is 7,932
commercial banks and savings institutions. As of October 7, 2010, there
have been 129 failed institutions. Federal Deposit Insurance
Corporation, Failures and Assistance Transactions (online at
www2.fdic.gov/hsob/SelectRpt.asp?EntryTyp=30) (accessed Oct. 7, 2010).
Asset totals adjusted for deflation into 2005 dollars using the GDP
implicit price deflator. The quarterly values were averaged into a
yearly value. Series DGS30: Selected Interest Rates, supra note 424.
[GRAPHIC] [TIFF OMITTED] 61540A.008
In its September 2010 report, \427\ the Panel analyzed in
detail the condition of the so-called ``too big to fail''
banks: the 19 institutions stress-tested under the Supervisory
Capital Assessment Program. While in the aggregate these banks
have improved their net income and capital ratios significantly
since the crisis, they still remain vulnerable to problems in
the residential and commercial real estate markets. Nearly $97
billion in real estate loans are at least 90 days past due as
of the second quarter of 2010.
---------------------------------------------------------------------------
\427\ Congressional Oversight Panel, September Oversight Report:
Assessing the TARP on the Eve of its Expiration, at 81 (Sept. 16, 2010)
(online at cop.senate.gov/documents/cop-091610-report.pdf).
---------------------------------------------------------------------------
FIGURE 25: TOTAL REAL ESTATE LOANS 90+ DAYS PAST DUE AT STRESS-TESTED
BANKS \428\
---------------------------------------------------------------------------
\428\ SNL Financial. All loans secured by real estate, for the
fully consolidated bank (includes loans secured by real estate with
original maturities of 60 months or less made to finance land
development or construction, loans secured by farmland, loans secured
by 1-4 family residential properties, loans secured by multifamily (5
or more) residential properties, loans secured by nonfarm residential
properties) that are 90 days or more past due and upon which the bank
continues to accrue interest.
[GRAPHIC] [TIFF OMITTED] 61540A.009
3. Housing Indices
Foreclosure actions, which consist of default notices,
scheduled auctions, and bank repossessions, increased 4 percent
in August to 338,836. This metric is over 21 percent above the
foreclosure action level at the time of the EESA enactment.
Five states accounted for more than 50 percent of the national
total, with California alone accounting for 20 percent.\429\
Sales of new homes stayed constant at 288,000, but remain
extremely low.\430\ The Case-Shiller 20-City Composite as well
as the FHFA Housing Price Index decreased slightly in July
2010. The Case-Shiller and FHFA indices are respectively 6
percent and 5 percent below their levels in October 2008.\431\
---------------------------------------------------------------------------
\429\ RealtyTrac, Foreclosure Activity Press Releases, Foreclosure
Activity Increases 4 Percent in August (Sept. 16, 2010) (online at
www.realtytrac.com/content/press-releases/foreclosure-activity-
increases-4-percent-in-august-6041).
\430\ Sales of new homes in May 2010 were 276,000, the lowest rate
since 1963. It should be noted that this number likely reflects a
shifting of sales from May to April prompted by the April expiration of
tax credits designed to boost home sales. U.S. Census Bureau and U.S.
Department of Housing and Urban Development, New Residential Sales in
June 2010 (July 26, 2010) (online at www.census.gov/const/
newressales.pdf); U.S. Census Bureau, New Residential Sales--New One-
Family Houses Sold (online at www.census.gov/ftp/pub/const/
sold_cust.xls) (accessed Oct. 5, 2010).
\431\ Most recent data available for July 2010. See Standard and
Poor's, S&P/Case-Shiller Home Price Indices (Instrument: Case-Shiller
20-City Composite Seasonally Adjusted, Frequency: Monthly) (accessed
Oct. 5, 2010) (online at www.standardandpoors.com/indices/sp-case-
shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----)
(hereinafter ``S&P/Case-Shiller Home Price Indices''); Federal Housing
Finance Agency, U.S. and Census Division Monthly Purchase Only Index
(Instrument: USA, Seasonally Adjusted) (online at www.fhfa.gov/
Default.aspx?Page=87) (accessed Oct. 5, 2010) (hereinafter ``U.S. and
Census Division Monthly Purchase Only Index''). S&P has cautioned that
the seasonal adjustment is probably being distorted by irregular
factors. These distortions could include distressed sales and the
various government programs. See Standard and Poor's, S&P/Case-Shiller
Home Price Indices and Seasonal Adjustment, S&P Indices: Index Analysis
(Apr. 2010).
---------------------------------------------------------------------------
Additionally, Case-Shiller futures prices indicate a market
expectation that home-price values for the major Metropolitan
Statistical Areas \432\ (``MSAs'') will generally decrease
through the end of 2010 and beginning of 2011.\433\ These
futures are cash-settled to a weighted composite index of U.S.
housing prices in the top 10 MSAs, as well as to those specific
markets, and are used both to hedge by businesses whose profits
and losses are related to any area of the housing industry and
to balance portfolios by businesses seeking exposure to an
uncorrelated asset class. As such, futures prices are a
composite indicator of market information known to date and can
be used to indicate market expectations for future home prices.
---------------------------------------------------------------------------
\432\ The general concept of a Metropolitan Statistical Area is
that of a core area containing a substantial population nucleus,
together with adjacent communities having a high degree of economic and
social integration with the core. U.S. Census Bureau, About
Metropolitan and Micropolitan Statistical Areas (online at
www.census.gov/population/www/metroareas/aboutmetro.html) (accessed
Oct. 7, 2010).
\433\ Data accessed through Bloomberg data service on Oct. 5, 2010.
The Case-Shiller Futures contract is traded on the CME and is settled
to the Case-Shiller Index two months after the previous calendar
quarter. For example, the February contract is settled against the spot
value of the S&P Case-Shiller Home Price Index values representing the
fourth calendar quarter of the previous year, which is released in
February one day after the settlement of the contract. Note that most
close observers believe that the accuracy of these futures contracts as
forecasts diminishes the farther out one looks.
FIGURE 26: HOUSING INDICATORS
----------------------------------------------------------------------------------------------------------------
Percent Change from Percent Change
Indicator Most Recent Data Available at Since October
Monthly Data Time of Last Report 2008
----------------------------------------------------------------------------------------------------------------
Monthly foreclosure actions \434\...................... 338,836 4.2% 21.2%
S&P/Case-Shiller Composite 20 Index \435\.............. 147.6 (0.1) (5.6)
FHFA Housing Price Index \436\......................... 192.4 (0.5) (4.8)
----------------------------------------------------------------------------------------------------------------
\434\ RealtyTrac, Foreclosures (online at www.realtytrac.com/home/) (accessed Oct. 12, 2010). Most recent data
available for August 2010.
\435\ See S&P/Case-Shiller Home Price Indices, supra note 431. Most recent data available for July 2010.
\436\ U.S. and Census Division Monthly Purchase Only Index, supra note 431. Most recent data available for July
2010.
FIGURE 27: CASE-SHILLER HOME PRICE INDEX AND FUTURES VALUES \437\
---------------------------------------------------------------------------
\437\ All data normalized to 100 at January 2000. Futures data
accessed through Bloomberg data service on October 5, 2010. S&P/Case-
Shiller Home Price Indices, supra note 431.
[GRAPHIC] [TIFF OMITTED] 61540A.010
G. Financial Update
Each month, the Panel summarizes the resources that the
federal government has committed to the rescue and recovery of
the financial system. The following financial update provides:
(1) an updated accounting of the TARP, including a tally of
dividend income, repayments, and warrant dispositions that the
program has received as of August 31, 2010; and (2) an updated
accounting of the full federal resource commitment as of
September 29, 2010.
1. The TARP
a. Program Updates \438\
---------------------------------------------------------------------------
\438\ U.S. Department of the Treasury, Cumulative Dividends,
Interest and Distributions Report as of August 31, 2010 (Sept. 10,
2010) (online at financialstability.gov/docs/dividends-interest-
reports/August%202010%20Dividends%20and%20Interest%20Report.pdf)
(hereinafter ``Cumulative Dividends, Interest and Distributions Report
as of August 31, 2010''); Treasury Transactions Report, supra note 128.
---------------------------------------------------------------------------
Treasury's spending authority under the TARP officially
expired on October 3, 2010. Though it can no longer make new
funding commitments, Treasury can continue to provide funding
for programs with which it has existing contracts and previous
commitments. As of September 30, 2010, $396.5 billion had been
spent under the TARP's $475 billion ceiling.\439\ Of the amount
outstanding, $209.4 billion has been repaid, while Treasury has
incurred $6.1 billion in losses associated with its CPP and
AIFP investments. There are currently $181 billion in funds
outstanding.
---------------------------------------------------------------------------
\439\ The original $700 billion TARP ceiling was reduced by $1.26
billion as part of the Helping Families Save Their Homes Act of 2009.
12 U.S.C. Sec. 5225(a)-(b); Helping Families Save Their Homes Act of
2009, Pub. L. No. 111-22 Sec. 40. On June 30, 2010, the House-Senate
Conference Committee agreed to reduce the amount authorized under the
TARP from $700 billion to $475 billion as part of the Dodd-Frank Wall
Street Reform and Consumer Protection Act that was signed into law on
July 21, 2010. See Dodd-Frank Wall Street Reform and Consumer
Protection Act, Pub. L. No. 111-203 (2010); The White House, Remarks by
the President at Signing of Dodd-Frank Wall Street Reform and Consumer
Protection Act (July 21, 2010) (online at www.whitehouse.gov/the-press-
office/remarks-president-signing-dodd-frank-wall-street-reform-and-
consumer-protection-act).
---------------------------------------------------------------------------
CPP Repayments
As of September 30, 2010, 110 banks have fully redeemed
their CPP preferred shares either through capital repayment or
exchanges for investments under the CDCI. These institutions
have repaid a total of $152.8 billion of the $204.9 billion
committed to CPP. The amount of funds currently outstanding in
the program is $49.6 billion.
During the month of September, Treasury's CPP investment
amount was reduced by $5.3 billion. A significant portion of
this amount ($4.9 billion) came from proceeds earned from the
third round of sales of Citigroup common stock. As of September
30, 2010, Treasury still holds 3.6 billion shares of Citigroup
common equity with a face value of $11.7 billion. In addition,
Treasury received $220 million in repayments for its preferred
and subordinated debt investments in 12 participating
institutions. Another 17 institutions also exchanged $253
million of CPP funds for an equivalent investment under the
CDCI.
The reduction in outstanding CPP funds also includes a net
loss from Treasury's investments in South Financial Group, Inc.
and TIB Financial Corp. These two institutions received a total
of $384 million through CPP. On September 30, 2010, Treasury
sold the preferred stock and warrants issued by South Financial
to Toronto-Dominion Bank (TD Bank) for $130.6 million as part
of the company's acquisition of South Financial.\440\ Treasury
also sold the preferred shares and warrants it received from
TIB Financial for $12.2 million to North American Financial
Holdings, Inc.\441\ As a result of these sales, Treasury
incurred a loss of $241.7 million, bringing total losses on CPP
investments to $2.6 billion.
---------------------------------------------------------------------------
\440\ Treasury Transactions Report, supra note 128; TD Bank
Financial Group, TD Bank Marks Another Important Milestone in Expansion
of U.S. Footprint (Oct. 1, 2010) (online at td.mediaroom.com/
index.php?s=43&item=1045).
\441\ As part of its $175 billion investment in TIB Financial
Corp., North American Financial Holdings, Inc. also agreed to purchase
37,000 shares of CPP preferred stock, along with related warrants, from
Treasury. TIB Financial Corp., TIB Financial Corp. Announces Closing of
$175 Million Investment From North American Financial Holdings, Inc.
(Sept. 30, 2010) (online at www.tibfinancialcorp.com/
file.aspx?IID=108287&FID=10162725).
---------------------------------------------------------------------------
b. Income: Dividends, Interest, and Warrant Sales
As of September 30, 2010, 45 institutions have repurchased
their warrants for common shares that Treasury received in
conjunction with its preferred stock investments. Treasury
received $19.7 million from six banks that agreed to repurchase
their warrants in September. Treasury has also sold the
warrants for common shares for 15 other institutions at
auction. On September 16, 2010, Treasury held an auction for 13
million warrants to purchase common shares of Lincoln National
Corporation. The offering yielded $213.7 million in net
proceeds to Treasury. On September 21, 2010, Treasury also
auctioned off 52 million warrants issued by the Hartford
Financial Services Group, Inc. for $706.3 million in proceeds.
In addition to warrant disposition proceeds, Treasury also
receives dividend payments on the preferred shares that it
holds, usually 5 percent per annum for the first five years and
9 percent per annum thereafter.\442\ In total, Treasury has
received approximately $25.3 billion in net income from warrant
repurchases, dividends, interest payments, and other proceeds
deriving from TARP investments (after deducting losses).\443\
For further information on TARP profit and loss, see Figure 29.
---------------------------------------------------------------------------
\442\ U.S. Department of the Treasury, Securities Purchase
Agreement for Public Institutions (online at
www.financialstability.gov/docs/CPP/spa.pdf) (accessed Oct. 12, 2010).
\443\ Cumulative Dividends, Interest and Distributions Report as of
August 31, 2010, supra note 438; Treasury Transactions Report, supra
note 128. Treasury also received an additional $1.2 billion in
participation fees from its Guarantee Program for Money Market Funds.
U.S. Department of the Treasury, Treasury Announces Expiration of
Guarantee Program for Money Market Funds (Sept. 18, 2009) (online at
www.ustreas.gov/press/releases/tg293.htm).
---------------------------------------------------------------------------
c. TARP Accounting
FIGURE 28: TARP ACCOUNTING (AS OF SEPTEMBER 30, 2010)
[billions of dollars] i
----------------------------------------------------------------------------------------------------------------
Total
Maximum Actual Repayments/ Total Funding Funding
Program Amount Funding Reduced Losses Currently Available
Allotted Exposure Outstanding
----------------------------------------------------------------------------------------------------------------
Capital Purchase Program $204.9 $204.9 ii ($152.8) iii ($2.6) $49.6 $0
(CPP).......................
Targeted Investment Program 40.0 40.0 (40.0) 0 0 0
(TIP).......................
Asset Guarantee Program (AGP) 5.0 iv 5.0 v (5.0) 0 0 0
AIG Investment Program 69.8 vi 49.1 0 0 49.1 20.7
(AIGIP).....................
Auto Industry Financing 81.3 81.3 (10.8) vii (3.5) viii 67.1 0
Program (AIFP)..............
Auto Supplier Support Program 0.4 0.4 (0.4) 0 0 0
(ASSP) ix...................
Term Asset-Backed Securities x 4.3 xi 0.1 0 0 0.1 4.2
Loan Facility (TALF)........
Public-Private Investment 22.4 xiii 14.2 xiv (0.4) 0 13.8 8.2
Program (PPIP) xii..........
SBA 7(a) Securities Purchase. 0.4 xv 0.36 0 0 0.36 0
Home Affordable Modification 29.9 0.5 0 0 0.5 29.4
Program (HAMP)..............
Hardest Hit Fund (HHF)....... xvi 7.6 xvii 0.06 0 0 0.06 7.5
FHA Refinance Program........ 8.1 0 0 0 0 8.1
Community Development Capital 0.8 xviii 0.57 0 0 0.57 0
Initiative (CDCI)...........
Total.................... $475 396.48 (209.4) (6.1) 181.07 78.2
----------------------------------------------------------------------------------------------------------------
i Figures affected by rounding. Unless otherwise noted, data in this table are from the following source: U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
30, 2010 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
ii Total amount repaid under CPP includes $13.4 billion Treasury received as part of its sales of Citigroup
common stock. As of September 30, 2010, Treasury had sold 4.1 billion Citigroup common shares for $16.4
billion in gross proceeds. Treasury has received $3 billion in net profit from the sale of Citigroup common
stock. In June 2009, Treasury exchanged $25 billion in Citigroup preferred stock for 7.7 billion shares of the
company's common stock at $3.25 per share. U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending September 30, 2010, at 13, 14 (Oct. 4, 2010) (online at
financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf); U.S.
Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 25 (Oct. 2010) (online
at www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
Total CPP repayments also include amounts repaid by institutions that exchanged their CPP investments for
investments under the CDCI, as well as proceeds earned from the sale of preferred stock and warrants issued by
South Financial Group, Inc. and TIB Financial Corp.
iii On the TARP Transactions Report, Treasury has classified the investments it made in two institutions, CIT
Group ($2.3 billion) and Pacific Coast National Bancorp ($4.1 million), as losses. In addition, Treasury sold
its preferred ownership interests, along with warrants, in South Financial Group, Inc. and TIB Financial Corp.
to non-TARP participating institutions. These shares were sold at prices below the value of the original CPP
investment. Therefore, Treasury's net current CPP investment is $49.6 billion due to the $2.6 billion in
losses thus far. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the
Period Ending September 30, 2010, at 13, 14 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-
reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
iv The $5 billion AGP guarantee for Citigroup was unused since Treasury was not required to make any guarantee
payments during the life of the program. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-
Year Retrospective, at 31 (Oct. 2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
v Although this $5 billion is no longer exposed as part of the AGP, Treasury did not receive a repayment in the
same sense as with other investments. Treasury did receive other income as consideration for the guarantee,
which is not a repayment and is accounted for in Figure 29.
vi AIG has completely utilized the $40 billion that was made available on November 25, 2008 in exchange for the
company's preferred stock. It has also drawn down $7.5 billion of the $29.8 billion made available on April
17, 2009. This figure also reflects $1.6 billion in accumulated but unpaid dividends owed by AIG to Treasury
due to the restructuring of Treasury's investment from cumulative preferred shares to non-cumulative shares.
AIG expects to draw down up to $22.3 billion in outstanding funds from the TARP as part of its plan to repay
the revolving credit facility provided by the Federal Reserve Bank of New York. American International Group,
Inc., Form 10-K for the Fiscal Year Ended December 31, 2009, at 45 (Feb. 26, 2010) (online at www.sec.gov/
Archives/edgar/data/5272/000104746910001465/a2196553z10-k.htm); American International Group, Inc., AIG
Announces Plan to Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/newsroom/
2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf); U.S. Department of the Treasury, Troubled Asset Relief
Program Transactions Report for the Period Ending September 30, 2010, at 21 (Oct. 4, 2010) (online at
financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
vii On May 14, 2010, Treasury accepted a $1.9 billion settlement payment for its $3.5 billion loan to Chrysler
Holding. The payment represented a $1.6 billion loss from the termination of the debt obligation. U.S.
Department of the Treasury, Chrysler Financial Parent Company Repays $1.9 Billion in Settlement of Original
Chrysler Loan (May 17, 2010) (online at www.financialstability.gov/latest/pr_05172010c.html). Also, following
the bankruptcy proceedings for Old Chrysler, which extinguished the $1.9 billion debtor-in-possession (DIP)
loan provided to Old Chrysler, Treasury retained the right to recover the proceeds from the liquidation of
specified collateral. To date, Treasury has collected $40.2 million in proceeds from the sale of collateral,
and it does not expect a significant recovery from the liquidation proceeds. Treasury includes these proceeds
as part of the $10.8 billion repaid under the AIFP. U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--August 2010 (Sept. 10, 2010) (online at financialstability.gov/docs/
105CongressionalReports/August%202010%20105(a)%20Report_final_9%2010%2010.pdf); Treasury conversations with
Panel staff (Aug. 19, 2010); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions
Report for the Period Ending September 30, 2010, at 18 (Oct. 4, 2010) (online at financialstability.gov/docs/
transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
viii On the TARP Transactions Report, the $1.9 billion Chrysler debtor-in-possession loan, which was
extinguished April 30, 2010, was deducted from Treasury's AIFP investment amount. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 18
(Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf). See note vii, supra, for details on losses from
Treasury's investment in Chrysler.
ix On April 5, 2010, Treasury terminated its commitment to lend to the GM SPV under the ASSP. On April 7, 2010,
it terminated its commitment to lend to the Chrysler SPV. In total, Treasury received $413 million in
repayments from loans provided by this program ($290 million from the GM SPV and $123 million from the
Chrysler SPV). Further, Treasury received $101 million in proceeds from additional notes associated with this
program. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending September 30, 2010, at 19 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-
4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
x For the TALF program, one dollar of TARP funds was committed for every $10 of funds obligated by the Federal
Reserve. The program was intended to be a $200 billion initiative, and the TARP was responsible for the first
$20 billion in loan-losses, if any were incurred. The loan is incrementally funded. When the program closed in
June 2010, a total of $43 billion in loans was outstanding under the TALF program, and the TARP's commitments
constituted $4.3 billion. The Federal Reserve Board of Governors agreed that it was appropriate for Treasury
to reduce TALF credit protection from TARP to $4.3 billion. Board of Governors of the Federal Reserve System,
Federal Reserve Announces Agreement with the Treasury Department Regarding a Reduction of Credit Protection
Provided for the Term Asset-Backed Securities Loan Facility (TALF) (July 20, 2010) (online at
www.federalreserve.gov/newsevents/press/monetary/20100720a.htm).
xi As of September 30, 2010, Treasury had provided $105 million to TALF LLC. This total includes accrued payable
interest. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1), at 5 (Sept. 30, 2010)
(online at www.federalreserve.gov/releases/h41/20100930/h41.pdf).
xii On July 19, 2010, Treasury released its third quarterly report on the Legacy Securities Public-Private
Investment Partnership (PPIP). As of June 30, 2010, the total value of assets held by the PPIP managers was
$16 billion. Non-agency Residential Mortgage-Backed Securities represented 85 percent of the total; CMBS
represented the balance. U.S. Department of the Treasury, Legacy Securities Public-Private Investment Program,
Program Update--Quarter Ended June 30, 2010, at 3, 4 (July 19, 2010) (online at www.financialstability.gov/
docs/111.pdf).
xiii U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at i (Oct. 2010)
(online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xiv As of September 30, 2010, Treasury has received $428 million in capital repayments from two PPIP fund
managers. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending September 30, 2010, at 23 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-
4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xv Treasury made $64 million in purchases under the SBA 7(a) Securities Purchase Program in September. As of
September 30, 2010, Treasury's purchases totaled $322.9 million. U.S. Department of the Treasury, Troubled
Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 22 (Oct. 4, 2010)
(online at financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-
10.pdf). Treasury will not make additional purchases pursuant to the expiration of its purchasing authority
under EESA. U.S. Department of the Treasury, Troubled Asset Relief Program: Two-Year Retrospective, at 43
(Oct. 2010) (online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xvi As part of its revisions to TARP allocations upon enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Treasury allocated an additional $2 billion in TARP funds to mortgage assistance for
unemployed borrowers through the Hardest Hit Fund (HHF). U.S. Department of the Treasury, Obama Administration
Announces Additional Support for Targeted Foreclosure-Prevention Programs to Help Homeowners Struggling with
Unemployment (Aug. 11, 2010) (online at www.ustreas.gov/press/releases/tg823.htm). Another $3.5 billion was
allocated among the 18 states and the District of Columbia currently participating in HHF. The amount each
state received during this round of funding is proportional to its population. U.S. Department of the
Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 72 (Oct. 2010) (online at
www.financialstability.gov/docs/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
Additional information provided by Treasury staff (Sept. 28, 2010).
xvii This figure represents the total amount paid to date to state Housing Finance Agencies (HFAs). As of
October 12, 2010, six state HFAs have drawn down funds from their total investment amount. Data provided by
Treasury (Oct. 12, 2010).
xviii Seventy-three Community Development Financial Institutions (CDFIs) entered the CDCI in September. Among
these institutions, 17 banks exchanged their CPP investments for an equivalent investment amount under the
CDCI. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
September 30, 2010, at 1-13, 16-17 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/
10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf). Treasury closed the program on September 30, 2010,
after investing $570 million in 84 CDFIs. U.S. Department of the Treasury, Treasury Announces Special
Financial Stabilization Initiative Investments of $570 Million in 84 Community Development Financial
Institutions in Underserved Areas (Sept. 30, 2010) (online at financialstability.gov/latest/
pr_09302010b.html).
FIGURE 29: TARP PROFIT AND LOSS
[millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Warrant
Dividendsxx Interestxxi Disposition Other Proceeds Lossesxxiii
TARP Initiativexix (as of 8/31/ (as of 8/31/ Proceedsxxii (as of 8/31/ (as of 9/30/ Total
2010) 2010) (as of 9/30/ 2010) 2010)
2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... $16,540 $912 $8,160 $5,768 ($6,034) $25,346
CPP..................................................... 9,754 49 6,904 xxiv 3,015 (2,576) 17,194
TIP..................................................... 3,004 -- 1,256 -- -- 4,260
AIFP.................................................... xxv 3,371 802 -- xxvi 15 (3,458) 730
ASSP.................................................... -- 15 -- xxvii 101 -- 116
AGP..................................................... 411 -- 0 xxviii 2,246 -- 2,657
PPIP.................................................... -- 46 -- xxix 115 -- 161
SBA 7(a)................................................ -- 1 -- -- -- 1
Bank of America Guarantee............................... -- -- -- xxx 276 -- 276
--------------------------------------------------------------------------------------------------------------------------------------------------------
xix AIG is not listed on this table because no profit or loss has been recorded to date for AIG. Its missed dividends were capitalized as part of the
issuance of Series E preferred shares and are not considered to be outstanding. Treasury currently holds non-cumulative preferred shares, meaning AIG
is not penalized for non-payment. Therefore, no profit or loss has been realized on Treasury's AIG investment to date.
xx U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of August 31, 2010 (Sept. 10, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/August%202010%20Dividends%20and%20Interest%20Report.pdf).
xxi U.S. Department of the Treasury, Cumulative Dividends, Interest and Distributions Report as of August 31, 2010 (Sept. 10, 2010) (online at
financialstability.gov/docs/dividends-interest-reports/August%202010%20Dividends%20and%20Interest%20Report.pdf).
xxii U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 13, 20 (Oct. 4,
2010) (online at financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xxiii In the TARP Transactions Report, Treasury classified the investments it made in two institutions, CIT Group ($2.3 billion) and Pacific Coast
National Bancorp ($4.1 million), as losses. Treasury has also sold its preferred ownership interests and warrants from South Financial Group, Inc. and
TIB Financial Corp. This represents a $241.7 million loss on its CPP investments in these two banks. Two TARP recipients, UCBH Holdings, Inc. ($298.7
million) and a banking subsidiary of Midwest Banc Holdings, Inc. ($89.4 million), are currently in bankruptcy proceedings. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010 (Oct. 4, 2010) (online at financialstability.gov/
docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf). Finally, Sonoma Valley Bancorp, which received $8.7 million in CPP
funding, was placed into receivership on August 20, 2010. Federal Deposit Insurance Corporation, Westamerica Bank, San Rafael, California, Assumes All
of the Deposits of Sonoma Valley Bank, Sonoma, California (Aug. 20, 2010) (online at www.fdic.gov/news/news/press/2010/pr10196.html).
xxiv This figure represents net proceeds to Treasury from the sale of Citigroup common stock to date. For details on Treasury's sales of Citigroup
common stock, see Section Two and note ii, supra. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period
Ending September 30, 2010 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-
10.pdf).
xxv This figure includes $815 million in dividends from GMAC preferred stock, trust preferred securities, and mandatory convertible preferred shares.
The dividend total also includes a $748.6 million senior unsecured note from Treasury's investment in General Motors. Data provided by Treasury.
xxvi Treasury received proceeds from an additional note connected with the loan made to Chrysler Financial on January 16, 2009. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 18 (Oct. 4, 2010) (online at
financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xxvii This represents the total proceeds from additional notes connected with Treasury's investments in GM Supplier Receivables LLC and Chrysler
Receivables SPV LLC. U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at
19 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xxviii As a fee for taking a second-loss position of up to $5 billion on a $301 billion pool of ring-fenced Citigroup assets as part of the AGP,
Treasury received $4.03 billion in Citigroup preferred stock and warrants. Treasury exchanged these preferred stocks for trust preferred securities in
June 2009. Following the early termination of the guarantee in December 2009, Treasury cancelled $1.8 billion of the trust preferred securities,
leaving Treasury with a premium of $2.23 billion in Citigroup trust preferred securities. On September 30, 2010, Treasury sold these securities for
$2.25 billion in total proceeds. At the end of Citigroup's participation in the FDIC's TLGP, the FDIC may transfer $800 million of $3.02 billion in
Citigroup Trust Preferred Securities it received in consideration for its role in the AGP to Treasury. U.S. Department of the Treasury, Troubled Asset
Relief Program Transactions Report for the Period Ending September 30, 2010, at 20 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-
reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf); U.S. Department of the Treasury, Board of Governors of the Federal Reserve System,
Federal Deposit Insurance Corporation, and Citigroup Inc., Termination Agreement, at 1 (Dec. 23, 2009) (online at www.financialstability.gov/docs/
Citi%20AGP%20Termination%20Agreement%20-%20Fully%20Executed%20Version.pdf); U.S. Department of the Treasury, Treasury Announces Further Sales of
Citigroup Securities and Cumulative Return to Taxpayers of $41.6 Billion (Sept. 30, 2010) (online at financialstability.gov/latest/pr_09302010c.html);
Federal Deposit Insurance Corporation, 2009 Annual Report, at 87 (June 30, 2010) (online at www.fdic.gov/about/strategic/report/2009annualreport/
AR09final.pdf).
xxix As of August 31, 2010, Treasury has earned $93.9 million in membership interest distributions from the PPIP. Additionally, Treasury has earned
$20.6 million in total proceeds following the termination of the TCW fund. See U.S. Department of the Treasury, Cumulative Dividends, Interest and
Distributions Report as of August 31, 2010, at 12-13 (Sept. 10, 2010) (online at financialstability.gov/docs/dividends-interest-reports/
August%202010%20Dividends%20and%20Interest%20Report.pdf); see U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for
the Period Ending September 30, 2010, at 23 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xxx Although Treasury, the Federal Reserve, and the FDIC negotiated with Bank of America regarding a similar guarantee, the parties never reached an
agreement. In September 2009, Bank of America agreed to pay each of the prospective guarantors a fee as though the guarantee had been in place during
the negotiations period. This agreement resulted in payments of $276 million to Treasury, $57 million to the Federal Reserve, and $92 million to the
FDIC. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Bank of America
Corporation, Termination Agreement, at 1-2 (Sept. 21, 2009) (online at www.financialstability.gov/docs/AGP/BofA%20-%20Termination%20Agreement%20-
%20executed.pdf).
d. CPP Unpaid Dividend and Interest Payments \444\
---------------------------------------------------------------------------
\444\ Cumulative Dividends, Interest and Distributions Report as of
August 31, 2010, supra note 438.
---------------------------------------------------------------------------
As of August 31, 2010, 123 institutions have at least one
outstanding dividend payment on preferred stock issued under
CPP.\445\ Among these institutions, 98 are not current on
cumulative dividends, which amount to $129.8 million in missed
payments, while another 25 banks have not paid $8 million in
non-cumulative dividends. Of the $49.6 billion currently
outstanding in CPP funding, Treasury's investments in banks
with non-current dividend payments total $3.6 billion. A
majority of the banks that remain delinquent on dividend
payments have under $1 billion in total assets on their balance
sheets. Also, there are 16 institutions that previously
deferred dividend payments, but have since repaid all accrued
and unpaid dividends.\446\
---------------------------------------------------------------------------
\445\ Does not include banks with missed dividend payments that
have either repaid all delinquent dividends, exited TARP, gone into
receivership, or filed for bankruptcy.
\446\ Among the institutions with no outstanding dividend payments
is Sterling Financial Corporation (WA). On April 29, 2010, Sterling
Financial exchanged its original $303 million preferred equity
investment for an equivalent amount in mandatory convertible preferred
stock. This investment was subsequently converted to 379 million shares
of common stock. Following the exchange, no dividend payments remained
outstanding with respect to the preferred investment. Treasury
Transactions Report, supra note 128; Cumulative Dividends, Interest and
Distributions Report as of August 31, 2010, supra note 438, at 18.
---------------------------------------------------------------------------
There are six banks that have failed to make six dividend
payments, while one bank has missed all seven quarterly
payments. These institutions have received a total of $207.1
million in CPP funding. Under the terms of the CPP, after a
bank fails to pay dividends for six periods, Treasury has the
right to elect two individuals to the company's board of
directors.\447\ Figure 30 below provides further details on the
distribution and the number of institutions that have missed
dividend payments.
---------------------------------------------------------------------------
\447\ U.S. Department of the Treasury, Frequently Asked Questions
Capital Purchase Program (CPP): Related to Missed Dividend (or
Interest) Payments and Director Nomination (online at
www.financialstability.gov/docs/CPP/CPP%20Directors%20FAQs.pdf)
(accessed Oct. 12, 2010).
---------------------------------------------------------------------------
In addition, eight CPP participants have missed at least
one interest payment, totaling $3.6 million in non-current
interest payments. Treasury's total investments in these non-
public institutions represent less than $1 billion in CPP
funding.
FIGURE 30: CPP MISSED DIVIDEND PAYMENTS (AS OF AUGUST 31, 2010) \448\
----------------------------------------------------------------------------------------------------------------
Number of Missed Payments 1 2 3 4 5 6 7 Total
----------------------------------------------------------------------------------------------------------------
Cumulative Dividends:
Number of Banks, by asset size.......... 30 19 18 18 10 3 0 98
Under $1B........................... 21 15 12 11 5 1 0 65
$1B-$10B............................ 8 4 4 7 5 2 0 30
Over $10B........................... 1 0 2 0 0 0 0 3
Non-Cumulative Dividends:
Number of Banks, by asset size.......... 2 5 6 3 5 3 1 25
Under $1B........................... 1 5 5 3 5 3 1 23
$1B-$10B............................ 1 0 1 0 0 0 0 2
Over $10B........................... 0 0 0 0 0 0 0 0
Total Missed Payments................... ....... ....... ....... ....... ....... ....... ....... 123
----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------
\448\ Cumulative Dividends, Interest and Distributions Report as of
August 31, 2010, supra note 438. Data on total bank assets compiled
using SNL Financial data service (accessed Oct. 5, 2010).
---------------------------------------------------------------------------
e. Rate of Return
As of September 2, 2010, the average internal rate of
return for all public financial institutions that participated
in the CPP and fully repaid the U.S. government (including
preferred shares, dividends, and warrants) was 10.3 percent.
The internal rate of return is the annualized effective
compounded return rate that can be earned on invested capital.
Treasury received $713.7 million and $216.6 million from
auctions for Hartford Financial Services Group, Inc. and
Lincoln National Corporation warrants, respectively. These
proceeds represent 151 and 119 percent of the Panel's best
valuation estimate at the disposition date. As of September 30,
2010, Treasury has received $8.1 billion in total proceeds from
warrant repurchases and auctions.
The Panel's estimates on individual rates of return also
indicate negative values for the two CPP investments that were
sold in September. The internal rates of return for South
Financial Group and TIB Financial Corp. were -34.2 percent and
-38 percent as Treasury sold its CPP preferred equity in these
two companies for an aggregate loss of $241.7 million.
f. Warrant Disposition
FIGURE 31: WARRANT REPURCHASES/AUCTIONS FOR FINANCIAL INSTITUTIONS WHO HAVE FULLY REPAID CPP FUNDS (AS OF OCTOBER 5, 2010)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel's Best
Warrant Warrant Valuation Price/
Institution Investment Repurchase Repurchase/ Sale Estimate at Estimate IRR (Percent)
Date Date Amount Disposition Ratio
Date
--------------------------------------------------------------------------------------------------------------------------------------------------------
Old National Bancorp....................................... 12/12/2008 5/8/2009 $1,200,000 $2,150,000 0.558 9.3
Iberiabank Corporation..................................... 12/5/2008 5/20/2009 1,200,000 2,010,000 0.597 9.4
Firstmerit Corporation..................................... 1/9/2009 5/27/2009 5,025,000 4,260,000 1.180 20.3
Sun Bancorp, Inc........................................... 1/9/2009 5/27/2009 2,100,000 5,580,000 0.376 15.3
Independent Bank Corp...................................... 1/9/2009 5/27/2009 2,200,000 3,870,000 0.568 15.6
Alliance Financial Corporation............................. 12/19/2008 6/17/2009 900,000 1,580,000 0.570 13.8
First Niagara Financial Group.............................. 11/21/2008 6/24/2009 2,700,000 3,050,000 0.885 8.0
Berkshire Hills Bancorp, Inc............................... 12/19/2008 6/24/2009 1,040,000 1,620,000 0.642 11.3
Somerset Hills Bancorp..................................... 1/16/2009 6/24/2009 275,000 580,000 0.474 16.6
SCBT Financial Corporation................................. 1/16/2009 6/24/2009 1,400,000 2,290,000 0.611 11.7
HF Financial Corp.......................................... 11/21/2008 6/30/2009 650,000 1,240,000 0.524 10.1
State Street............................................... 10/28/2008 7/8/2009 60,000,000 54,200,000 1.107 9.9
U.S. Bancorp............................................... 11/14/2008 7/15/2009 139,000,000 135,100,000 1.029 8.7
The Goldman Sachs Group, Inc............................... 10/28/2008 7/22/2009 1,100,000,000 1,128,400,000 0.975 22.8
BB&T Corp.................................................. 11/14/2008 7/22/2009 67,010,402 68,200,000 0.983 8.7
American Express Company................................... 1/9/2009 7/29/2009 340,000,000 391,200,000 0.869 29.5
Bank of New York Mellon Corp............................... 10/28/2008 8/5/2009 136,000,000 155,700,000 0.873 12.3
Morgan Stanley............................................. 10/28/2008 8/12/2009 950,000,000 1,039,800,000 0.914 20.2
Northern Trust Corporation................................. 11/14/2008 8/26/2009 87,000,000 89,800,000 0.969 14.5
Old Line Bancshares Inc.................................... 12/5/2008 9/2/2009 225,000 500,000 0.450 10.4
Bancorp Rhode Island, Inc.................................. 12/19/2008 9/30/2009 1,400,000 1,400,000 1.000 12.6
Centerstate Banks of Florida Inc........................... 11/21/2008 10/28/2009 212,000 220,000 0.964 5.9
Manhattan Bancorp.......................................... 12/5/2008 10/14/2009 63,364 140,000 0.453 9.8
CVB Financial Corp......................................... 12/5/2008 10/28/2009 1,307,000 3,522,198 0.371 6.4
Bank of the Ozarks......................................... 12/12/2008 11/24/2009 2,650,000 3,500,000 0.757 9.0
Capital One Financial...................................... 11/14/2008 12/3/2009 148,731,030 232,000,000 0.641 12.0
JPMorgan Chase & Co........................................ 10/28/2008 12/10/2009 950,318,243 1,006,587,697 0.944 10.9
TCF Financial Corp......................................... 1/16/2009 12/16/2009 9,599,964 11,825,830 0.812 11.0
LSB Corporation............................................ 12/12/2008 12/16/2009 560,000 535,202 1.046 9.0
Wainwright Bank & Trust Company............................ 12/19/2008 12/16/2009 568,700 1,071,494 0.531 7.8
Wesbanco Bank, Inc......................................... 12/5/2008 12/23/2009 950,000 2,387,617 0.398 6.7
Union First Market Bankshares Corporation (Union Bankshares 12/19/2008 12/23/2009 450,000 1,130,418 0.398 5.8
Corporation)..............................................
Trustmark Corporation...................................... 11/21/2008 12/30/2009 10,000,000 11,573,699 0.864 9.4
Flushing Financial Corporation............................. 12/19/2008 12/30/2009 900,000 2,861,919 0.314 6.5
OceanFirst Financial Corporation........................... 1/16/2009 2/3/2010 430,797 279,359 1.542 6.2
Monarch Financial Holdings, Inc............................ 12/19/2008 2/10/2010 260,000 623,434 0.417 6.7
Bank of America............................................ \449\ 10/28/ 3/3/2010 1,566,210,714 1,006,416,684 1.533 6.5
2008
\450\ 1/9/2009
\451\ 1/14/
2009
Washington Federal Inc./Washington Federal Savings & Loan 11/14/2008 3/9/2010 15,623,222 10,166,404 1.537 18.6
Association...............................................
Signature Bank............................................. 12/12/2008 3/10/2010 11,320,751 11,458,577 0.988 32.4
Texas Capital Bancshares, Inc.............................. 1/16/2009 3/11/2010 6,709,061 8,316,604 0.807 30.1
Umpqua Holdings Corp....................................... 11/14/2008 3/31/2010 4,500,000 5,162,400 0.872 6.6
City National Corporation.................................. 11/21/2008 4/7/2010 18,500,000 24,376,448 0.759 8.5
First Litchfield Financial Corporation..................... 12/12/2008 4/7/2010 1,488,046 1,863,158 0.799 15.9
PNC Financial Services Group Inc........................... 12/31/2008 4/29/2010 324,195,686 346,800,388 0.935 8.7
Comerica Inc............................................... 11/14/2008 5/4/2010 183,673,472 276,426,071 0.664 10.8
Valley National Bancorp.................................... 11/14/2008 5/18/2010 5,571,592 5,955,884 0.935 8.3
Wells Fargo Bank........................................... 10/28/2008 5/20/2010 849,014,998 1,064,247,725 0.798 7.8
First Financial Bancorp.................................... 12/23/2008 6/2/2010 3,116,284 3,051,431 1.021 8.2
Sterling Bancshares, Inc./Sterling Bank.................... 12/12/2008 6/9/2010 3,007,891 5,287,665 0.569 10.8
SVB Financial Group........................................ 12/12/2008 6/16/2010 6,820,000 7,884,633 0.865 7.7
Discover Financial Services................................ 3/13/2009 7/7/2010 172,000,000 166,182,652 1.035 17.1
Bar Harbor Bancshares...................................... 1/16/2009 7/28/2010 250,000 518,511 0.482 6.2
Citizens & Northern Corporation............................ 1/16/2009 8/4/2010 400,000 468,164 0.854 5.9
Columbia Banking System, Inc............................... 11/21/2008 8/11/2010 3,301,647 3,291,329 1.003 7.3
Hartford Financial Services Group, Inc..................... 6/26/2009 9/21/2010 713,687,430 472,221,996 1.511 30.3
Lincoln National Corporation............................... 7/10/2009 9/16/2010 216,620,887 181,431,182 1.194 27.1
Fulton Financial Corporation............................... 12/23/2008 9/8/2010 10,800,000 15,616,013 0.692 6.7
The Bancorp, Inc./The Bancorp Bank......................... 12/12/2008 9/8/2010 4,753,985 9,947,683 0.478 12.8
South Financial Group, Inc./Carolina First Bank............ 12/5/2008 9/30/2010 400,000 1,164,486 0.343 (34.2)
TIB Financial Corp./TIB Bank............................... 12/5/2008 9/30/2010 40,000 235,757 0.170 (38.0)
Total \452\............................................ .............. ........... $8,148,332,166 $7,999,280,713 1.019 10.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
\449\ Investment date for Bank of America in CPP.
\450\ Investment date for Merrill Lynch in CPP.
\451\ Investment date for Bank of America in TIP.
\452\ Total warrant repurchase/sale amount does not include $11.5 million in proceeds from private institutions whose warrants for preferred stock were
immediately exercised.
FIGURE 32: VALUATION OF CURRENT HOLDINGS OF WARRANTS (AS OF OCTOBER 5,
2010)
[Dollars in millions]
------------------------------------------------------------------------
Warrant Valuation
Financial Institutions with --------------------------------------
Warrants Outstanding Low High Best
Estimate Estimate Estimate
------------------------------------------------------------------------
Citigroup, Inc.\453\............. $15.90 $1,134.42 $84.61
SunTrust Banks, Inc.............. 18.90 375.09 141.10
Regions Financial Corporation.... 11.62 213.46 99.85
Fifth Third Bancorp.............. 83.86 377.93 170.00
KeyCorp.......................... 21.91 176.85 81.47
AIG.............................. 282.18 1,824.23 783.69
All Other Banks.................. 845.40 3,832.34 1,794.84
Total........................ $1,279.77 $7,934.32 $3,155.56
------------------------------------------------------------------------
\453\ Includes warrants issued under CPP, AGP, and TIP.
2. Federal Financial Stability Efforts
a. Federal Reserve and FDIC Programs
In addition to the direct expenditures Treasury has
undertaken through the TARP, the federal government has engaged
in a much broader program directed at stabilizing the U.S.
financial system. Many of these initiatives explicitly augment
funds allocated by Treasury under specific TARP initiatives,
such as FDIC and Federal Reserve asset guarantees for
Citigroup, or operate in tandem with Treasury programs, such as
the interaction between PPIP and TALF. Other programs, like the
Federal Reserve's extension of credit through its Section 13(3)
facilities and SPVs and the FDIC's Temporary Liquidity
Guarantee Program, operate independently of the TARP.
b. Total Financial Stability Resources
Beginning in its April 2009 report, the Panel broadly
classified the resources that the federal government has
devoted to stabilizing the economy through myriad new programs
and initiatives as outlays, loans, or guarantees. With the
reductions in funding for certain TARP programs, the Panel
calculates the total value of these resources to be over $2.5
trillion. However, this would translate into the ultimate
``cost'' of the stabilization effort only if: (1) assets do not
appreciate; (2) no dividends are received, no warrants are
exercised, and no TARP funds are repaid; (3) all loans default
and are written off; and (4) all guarantees are exercised and
subsequently written off.
With respect to the FDIC and Federal Reserve programs, the
risk of loss varies significantly across the programs
considered here, as do the mechanisms providing protection for
the taxpayer against such risk. As discussed in the Panel's
November 2009 report, the FDIC assesses a premium of up to 100
basis points on TLGP debt guarantees.\454\ In contrast, the
Federal Reserve's liquidity programs are generally available
only to borrowers with good credit, and the loans are over-
collateralized and with recourse to other assets of the
borrower. If the assets securing a Federal Reserve loan realize
a decline in value greater than the ``haircut,'' the Federal
Reserve is able to demand more collateral from the borrower.
Similarly, should a borrower default on a recourse loan, the
Federal Reserve can turn to the borrower's other assets to make
the Federal Reserve whole. In this way, the risk to the
taxpayer on recourse loans only materializes if the borrower
enters bankruptcy.
---------------------------------------------------------------------------
\454\ Congressional Oversight Panel, November Oversight Report:
Guarantees and Contingent Payments in TARP and Related Programs, at 36
(Nov. 6, 2009) (online at cop.senate.gov/documents/cop-110609-
report.pdf).
---------------------------------------------------------------------------
c. Credit Union Assistance
Apart from the assistance credit unions have recently
received through the CDCI, the National Credit Union
Administration (NCUA), the federal agency charged with
regulating federal credit unions (FCUs), has also made efforts
to stabilize the corporate credit union (CCU) system. Corporate
credit unions provide correspondent services, as well as
liquidity and investment services to retail (or consumer)
credit unions.\455\ Since March 2009, the NCUA has placed five
CCUs into conservatorship due to their exposure to
underperforming private-label mortgage-backed securities. The
NCUA estimates that these five institutions, which have $72
billion in assets and provide services for 4,600 retail credit
unions, hold more than 90 percent of the MBS in the corporate
credit union system.\456\
---------------------------------------------------------------------------
\455\ National Credit Union Administration, Corporate System
Resolution: Corporate Credit Unions Frequently Asked Questions (FAQs),
at 1 (online at www.ncua.gov/Resources/CorporateCU/CSR/CSR-6.pdf).
\456\ National Credit Union Administration, Corporate System
Resolution: National Credit Union Administration Virtual Town Hall, at
14 (Sept. 27, 2010) (online at www.ncua.gov/Resources/CorporateCU/CSR/
10-0927WebinarSlides.pdf); National Credit Union Administration, Fact
Sheet: Corporate Credit Union Conservatorships (Sept. 14, 2010) (online
at www.ncua.gov/Resources/CorporateCU/CSR/CSR-14.pdf).
---------------------------------------------------------------------------
To assist in the NCUA's stabilization efforts, the
Temporary Corporate Credit Union Stabilization Fund
(``Stabilization Fund'') was created to help cover costs
associated with CCU conservatorships and liquidations. The
Stabilization Fund was established on May 20, 2009, as part of
the Helping Families Save Their Homes Act of 2009, and allows
the NCUA to borrow up to $6 billion from the Treasury on a
revolving basis.\457\ As of August 2010, the NCUA had drawn
$1.5 billion from the Stabilization Fund, and had planned to
repay this balance by the end of September.\458\
---------------------------------------------------------------------------
\457\ National Credit Union Administration, Board Action Memorandum
(June 15, 2010) (online at www.ncua.gov/GenInfo/BoardandAction/
DraftBoardActions/2010/Jun/
Item6aBAMSFAssessmentJune2010(1%20billion)FINAL.pdf).
\458\ Id.
---------------------------------------------------------------------------
d. Mortgage Purchase Programs
On September 7, 2008, Treasury announced the GSE Mortgage
Backed Securities Purchase Program. The Housing and Economic
Recovery Act of 2008 provided Treasury with the authority to
purchase MBS guaranteed by government-sponsored enterprises
(GSEs) through December 31, 2009. Treasury purchased
approximately $225 billion in GSE MBS by the time its authority
expired.\459\ As of September 2010, there was approximately
$159.6 billion in MBS still outstanding under this
program.\460\
---------------------------------------------------------------------------
\459\ U.S. Department of the Treasury, FY2011 Budget in Brief, at
138 (Feb. 2010) (online at www.treas.gov/offices/management/budget/
budgetinbrief/fy2011/FY%202011%20BIB%20(2).pdf).
\460\ U.S. Department of the Treasury, MBS Purchase Program:
Portfolio by Month (online at www.financialstability.gov/docs/
September%202010%20Portfolio%20by%20month.pdf) (accessed Oct. 12,
2010).
---------------------------------------------------------------------------
In March 2009, the Federal Reserve authorized purchases of
$1.25 MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie
Mae, and $200 billion of agency debt securities from Fannie
Mae, Freddie Mac, and the Federal Home Loan Banks.\461\ The
intended purchase amount for agency debt securities was
subsequently decreased to $175 billion.\462\ All purchasing
activity was completed on March 31, 2010. As of September 29,
2010, the Federal Reserve holds $1.08 trillion of agency MBS
and $154 billion of agency debt.\463\
---------------------------------------------------------------------------
\461\ Board of Governors of the Federal Reserve System, Federal
Reserve System Monthly Report on Credit and Liquidity Programs and the
Balance Sheet, at 5 (Sept. 2010) (online at www.federalreserve.gov/
monetarypolicy/files/monthlyclbsreport201009.pdf).
\462\ Id. at 5.
\463\ Board of Governors of the Federal Reserve System, Factors
Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at
www.federalreserve.gov/releases/h41/) (accessed Oct. 12, 2010).
FIGURE 33: FEDERAL GOVERNMENT FINANCIAL STABILITY EFFORT (AS OF SEPTEMBER 29, 2010)xxxi
[Dollars in billions]
----------------------------------------------------------------------------------------------------------------
Treasury Federal
Program (TARP) Reserve FDIC Total
----------------------------------------------------------------------------------------------------------------
Total........................................... $475 $1,414.6 $694.9 $2,584.5
Outlays xxxii............................... 234.9 1,258.3 188.9 1,682.1
Loans....................................... 23.4 156.3 0 179.7
Guarantees xxxiii........................... 4.3 0 506 510.3
Repaid and Unavailable TARP Funds........... 212.4 0 0 212.4
AIG xxxiv....................................... 69.8 84.7 0 154.5
Outlays..................................... xxxv 69.8 xxxvi 25.7 0 95.5
Loans....................................... 0 xxxvii 59 0 59
Guarantees.................................. 0 0 0 0
Citigroup....................................... 11.6 0 0 11.6
Outlays..................................... xxxviii11.6 0 0 11.6
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Purchase Program (Other)................ 40.5 0 0 40.5
Outlays..................................... xxxix 40.5 0 0 40.5
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Capital Assistance Program...................... N/A 0 0 xl N/A
TALF............................................ 4.3 38.7 0 43
Outlays..................................... 0 0 0 0
Loans....................................... 0 xlii 38.7 0 38.7
Guarantees.................................. xli 4.3 0 0 4.3
PPIP (Loans) xliii.............................. 0 0 0 0
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
PPIP (Securities)............................... xliv 22.4 0 0 22.4
Outlays..................................... 7.5 0 0 7.5
Loans....................................... 14.9 0 0 14.9
Guarantees.................................. 0 0 0 0
Making Home Affordable Program/Foreclosure 45.6 0 0 45.6
Mitigation.....................................
Outlays..................................... xlv 45.6 0 0 45.6
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Automotive Industry Financing Program........... xlvi 67.1 0 0 67.1
Outlays..................................... 59.0 0 0 59.0
Loans....................................... 8.1 0 0 8.1
Guarantees.................................. 0 0 0 0
Automotive Supplier Support Program............. 0.4 0 0 0.4
Outlays..................................... 0 0 0 0
Loans....................................... xlvii 0.4 0 0 0.4
Guarantees.................................. 0 0 0 0
SBA 7(a) Securities Purchase.................... xlviii 0.36 0 0 0.36
Outlays..................................... 0.36 0 0 0.36
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Community Development Capital Initiative........ xlix0.57 0 0 0.57
Outlays..................................... 0 0 0 0
Loans....................................... 0.57 0 0 0.57
Guarantees.................................. 0 0 0 0
Temporary Liquidity Guarantee Program........... 0 0 506 506
Outlays..................................... 0 0 0 0
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 l 506 506
Deposit Insurance Fund.......................... 0 0 188.9 188.9
Outlays..................................... 0 0 li 188.9 188.9
Loans....................................... 0 0 0 0
Guarantees.................................. 0 0 0 0
Other Federal Reserve Credit Expansion.......... 0 1,291.2 0 1,291.2
Outlays..................................... 0 lii 1,232.6 0 1,232.6
Loans....................................... 0 liii 58.6 0 58.6
Guarantees.................................. 0 0 0 0
----------------------------------------------------------------------------------------------------------------
xxxi All data in this figure are as of September 29, 2010, except for information regarding the FDIC's Temporary
Liquidity Guarantee Program (TLGP). Those data figures are as of August 31, 2010.
xxxii The term ``outlays'' is used here to describe the use of Treasury funds under the TARP, which are broadly
classifiable as purchases of debt or equity securities (e.g., debentures, preferred stock, exercised warrants,
etc.). These values were calculated using (1) Treasury's actual reported expenditures, and (2) Treasury's
anticipated funding levels as estimated by a variety of sources, including Treasury statements and GAO
estimates. Anticipated funding levels are set at Treasury's discretion, have changed from initial
announcements, and are subject to further change. Outlays used here represent investment and asset purchases--
as well as commitments to make investments and asset purchases--and are not the same as budget outlays, which
under section 123 of EESA are recorded on a ``credit reform'' basis.
xxxiii Although many of the guarantees may never be exercised or will be exercised only partially, the guarantee
figures included here represent the federal government's greatest possible financial exposure.
xxxiv AIG received an $85 billion credit facility from the Federal Reserve Bank of New York (FRBNY) (reduced to
$60 billion in November 2008, to $35 billion in December 2009, and then to $30 billion in September 2010). A
Treasury trust received Series C preferred convertible stock in exchange for the facility and $0.5 million.
The Series C shares amount to 79.9 percent ownership of common stock, minus the percentage of common shares
acquired through warrants. U.S. Government Accountability Office, Troubled Asset Relief Program: Status of
Government Assistance Provided to AIG (Sept. 2009) (GAO-09-975) (online at www.gao.gov/new.items/d09975.pdf).
On September 30, 2010, AIG announced its plans to repay its outstanding obligations to Treasury, FRBNY, and
the trust. For details on AIG's repayment plans, see Section Two. See also American International Group, AIG
Announces Plan to Repay U.S. Government (Sept. 30, 2010) (online at www.aigcorporate.com/newsroom/
2010_September/AIGAnnouncesPlantoRepay30Sept2010.pdf). For information regarding Treasury's TARP investments
in AIG, see note vi, supra. U.S. Government Accountability Office, Troubled Asset Relief Program: Status of
Government Assistance Provided to AIG (Sept. 2009) (GAO-09-975) (online at www.gao.gov/new.items/d09975.pdf).
Additional information was also provided by Treasury in response to a Panel inquiry.
xxxv This number includes investments under the AIGIP/SSFI Program: a $40 billion investment made on November
25, 2008, and a $30 billion investment made on April 17, 2009 (less a reduction of $165 million representing
bonuses paid to AIG Financial Products employees). As of August 31, 2010, AIG had utilized $47.5 billion of
the available $69.8 billion under the AIGIP/SSFI. U.S. Department of the Treasury, Troubled Assets Relief
Program Monthly 105(a) Report--August 2010, at 5, 24 (Sept. 10, 2010) (online at www.financialstability.gov/
docs/105CongressionalReports/August%202010%20105(a)%20Report_final_9%2010%2010.pdf).
xxxvi As part of the restructuring of the U.S. government's investment in AIG announced on March 2, 2009, the
amount available to AIG through the Revolving Credit Facility was reduced by $25 billion in exchange for
preferred equity interests in two special purpose vehicles, AIA Aurora LLC and ALICO Holdings LLC. These SPVs
were established to hold the common stock of two AIG subsidiaries: American International Assurance Company
Ltd. (AIA) and American Life Insurance Company (ALICO). As of September 29, 2010, the book value of the
Federal Reserve Bank of New York's holdings in AIA Aurora LLC and ALICO Holdings LLC is $25.7 billion in
preferred equity ($16.5 billion in AIA and $9.3 billion in ALICO). Federal Reserve Bank of New York, Factors
Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at www.federalreserve.gov/releases/h41/20100930/).
xxxvii This number represents the full $30 billion that is available to AIG through its Revolving Credit
Facility (RCF) with FRBNY ($18.9 billion had been drawn down as of September 29, 2010) and the outstanding
principal of the loans extended to the Maiden Lane II and III SPVs to buy AIG assets (as of September 29,
2010, $13.7 billion and $14.6 billion, respectively). The maximum amount available through the RCF decreased
from $34 billion over the past two months, as a result of the sale of two AIG subsidiaries, as well as the
company's sale of CME Group, Inc. common stock. The reduced ceiling also reflects a $3.95 billion repayment to
the RCF from proceeds earned from a debt offering by the International Lease Finance Corporation (ILFC), an
AIG subsidiary.
The amounts outstanding under the Maiden Lane II and III facilities do not reflect the accrued interest payable
to FRBNY. Income from the purchased assets is used to pay down the loans to the SPVs, reducing the taxpayers'
exposure to losses over time. Federal Reserve Bank of New York, Factors Affecting Reserve Balances (H.4.1)
(Sept. 30, 2010) (online at www.federalreserve.gov/releases/h41/20100930/Board of Governors of the Federal
Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet,
at 15 (July 2010) (online at www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201007.pdf); Board
of Governors of the Federal Reserve System, Federal Reserve System Monthly Report on Credit and Liquidity
Programs and the Balance Sheet, at 16 (Aug. 2010) (online at www.federalreserve.gov/monetarypolicy/files/
monthlyclbsreport201008.pdf); Board of Governors of the Federal Reserve System, Federal Reserve System Monthly
Report on Credit and Liquidity Programs and the Balance Sheet, at 15 (Sept. 2010) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport201009.pdf).
xxxviii This figure represents Treasury's $25 billion investment in Citigroup, minus $13.4 billion applied as a
repayment for CPP funding. The amount repaid comes from the $16.4 billion in gross proceeds Treasury received
from the sale of 4.1 billion Citigroup common shares. See note ii, supra (discussing the details of the sales
of Citigroup common stock to date). U.S. Department of the Treasury, Troubled Asset Relief Program
Transactions Report for the Period Ending September 30, 2010, at 13 (Oct. 4, 2010) (online at
financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xxxix This figure represents the $204.9 billion Treasury disbursed under the CPP, minus the $25 billion
investment in Citigroup identified above, $139.4 billion in repayments (excluding the amount repaid for the
Citigroup investment) that are in ``repaid and unavailable'' TARP funds, and losses under the program. This
figure does not account for future repayments of CPP investments and dividend payments from CPP investments.
U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
September 30, 2010, at 13 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xl On November 9, 2009, Treasury announced the closing of the CAP and that only one institution, GMAC, was in
need of further capital from Treasury. GMAC, however, received further funding through the AIFP. Therefore,
the Panel considers CAP unused and closed. U.S. Department of the Treasury, Treasury Announcement Regarding
the Capital Assistance Program (Nov. 9, 2009) (online at www.financialstability.gov/latest/tg_11092009.html).
xli This figure represents the $4.3 billion adjusted allocation to the TALF SPV. However, as of September 29,
2010, TALF LLC had drawn only $105 million of the available $4.3 billion. Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at www.federalreserve.gov/
releases/h41/20100930/); U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report
for the Period Ending September 30, 2010 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-
reports/10-4-10%20Transactions%20Report%20as%20of%209-30-10.pdf). On June 30, 2010, the Federal Reserve ceased
issuing loans collateralized by newly issued CMBS. As of this date, investors had requested a total of $73.3
billion in TALF loans ($13.2 billion in CMBS and $60.1 billion in non-CMBS) and $71 billion in TALF loans had
been settled ($12 billion in CMBS and $59 billion in non-CMBS). Earlier, it ended its issues of loans
collateralized by other TALF-eligible newly issued and legacy ABS (non-CMBS) on March 31, 2010. Federal
Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: Terms and Conditions (online at
www.newyorkfed.org/markets/talf_terms.html) (accessed Oct. 12, 2010); Federal Reserve Bank of New York, Term
Asset-Backed Securities Loan Facility: CMBS (online at www.newyorkfed.org/markets/cmbs_operations.html)
(accessed Oct. 12, 2010); see Federal Reserve Bank of New York, Term Asset-Backed Securities Loan Facility:
CMBS (online at www.newyorkfed.org/markets/CMBS_recent_operations.html) (accessed Oct. 12, 2010); Federal
Reserve Bank of New York, Term Asset-Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/
markets/talf_operations.html) (accessed Oct. 12, 2010); see Federal Reserve Bank of New York, Term Asset-
Backed Securities Loan Facility: non-CMBS (online at www.newyorkfed.org/markets/TALF_recent_operations.html)
(accessed Oct. 12, 2010).
xlii This number is derived from the unofficial 1:10 ratio of the value of Treasury loan guarantees to the value
of Federal Reserve loans under the TALF. U.S. Department of the Treasury, Fact Sheet: Financial Stability
Plan, at 4 (Feb. 10, 2009) (online at www.financialstability.gov/docs/fact-sheet.pdf) (describing the initial
$20 billion Treasury contribution tied to $200 billion in Federal Reserve loans and announcing potential
expansion to a $100 billion Treasury contribution tied to $1 trillion in Federal Reserve loans). Since only
$43 billion in TALF loans remained outstanding when the program closed, Treasury is currently responsible for
reimbursing the Federal Reserve Board only up to $4.3 billion in losses from these loans. Thus, the Federal
Reserve's maximum potential exposure under the TALF is $38.7 billion. See Board of Governors of the Federal
Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 30, 2010) (online at www.federalreserve.gov/
releases/h41/20100930/).
xliii It is unlikely that resources will be expended under the PPIP Legacy Loans Program in its original design
as a joint Treasury-FDIC program to purchase troubled assets from solvent banks. In several sales described in
FDIC press releases, it appears that there is no Treasury participation, and FDIC activity is accounted for
here as a component of the FDIC's Deposit Insurance Fund outlays. See, e.g., Federal Deposit Insurance
Corporation, FDIC Statement on the Status of the Legacy Loans Program (June 3, 2009) (online at www.fdic.gov/
news/news/press/2009/pr09084.html).
xliv This figure represents Treasury's final adjusted investment amount in PPIP. As of September 30, 2010,
Treasury reported commitments of $14.9 billion in loans and $7.5 billion in membership interest associated
with PPIP. On January 4, 2010, Treasury and one of the nine fund managers, TCW Senior Management Securities
Fund, L.P. (TCW), entered into a ``Winding-Up and Liquidation Agreement.'' Treasury's final investment amount
in TCW totaled $356 million. Following the liquidation of the fund, Treasury's initial $3.3 billion obligation
to TCW was reallocated among the eight remaining funds on March 22, 2010. See U.S. Department of the Treasury,
Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 23 (Oct. 4,
2010) (online at financialstability.gov/docs/transaction-reports/10-4-10%20Transactions%20Report%20as%20of%209-
30-10.pdf).
xlv Of the $29.9 billion in TARP funding for HAMP, $28.8 billion has been allocated as of September 30, 2010.
However, as of September 30, 2010, only $484.9 million in non-GSE payments has been disbursed under HAMP. U.S.
Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September
30, 2010 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf). Data provided to Panel staff by Treasury staff (Oct. 13,
2010).
xlvi A substantial portion of the total $81.3 billion in loans extended under the AIFP has since been converted
to common equity and preferred shares in restructured companies. $8.1 billion has been retained as first lien
debt (with $1 billion committed to old GM and $7.1 billion to Chrysler). This figure ($67.1 billion)
represents Treasury's current obligation under the AIFP after repayments and losses. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 18
(Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xlvii This figure represents Treasury's total adjusted investment amount in the ASSP. U.S. Department of the
Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending September 30, 2010, at 19
(Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
xlviii U.S. Department of the Treasury, Troubled Asset Relief Program: Two Year Retrospective, at 43 (Oct. 2010)
(online at www.financialstability.gov/docs/
TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf).
xlix U.S. Department of the Treasury, Troubled Asset Relief Program Transactions Report for the Period Ending
September 30, 2010, at 17 (Oct. 4, 2010) (online at financialstability.gov/docs/transaction-reports/10-4-
10%20Transactions%20Report%20as%20of%209-30-10.pdf).
l This figure represents the current maximum aggregate debt guarantees that could be made under the program,
which is a function of the number and size of individual financial institutions participating. $292.6 billion
of debt subject to the guarantee is currently outstanding, which represents approximately 57.8 percent of the
current cap. Federal Deposit Insurance Corporation, Monthly Reports on Debt Issuance Under the Temporary
Liquidity Guarantee Program: Debt Issuance Under Guarantee Program (Aug. 31, 2010) (online at www.fdic.gov/
regulations/resources/TLGP/total_issuance08-10.html). The FDIC has collected $10.4 billion in fees and
surcharges from this program since its inception in the fourth quarter of 2008. Federal Deposit Insurance
Corporation, Monthly Reports Related to the Temporary Liquidity Guarantee Program: Fees Under Temporary
Liquidity Guarantee Debt Program (Aug. 31, 2010) (online at www.fdic.gov/regulations/resources/tlgp/
fees.html).
li This figure represents the FDIC's provision for losses to its deposit insurance fund attributable to bank
failures in the third and fourth quarters of 2008, the first, second, third, and fourth quarters of 2009, and
the first quarter of 2010. Federal Deposit Insurance Corporation, Chief Financial Officer's (CFO) Report to
the Board: DIF Income Statement--Second Quarter 2010 (online at www.fdic.gov/about/strategic/corporate/
cfo_report_2ndqtr_10/income.html). For earlier reports, see Federal Deposit Insurance Corporation, Chief
Financial Officer's (CFO) Report to the Board (online at www.fdic.gov/about/strategic/corporate/index.html)
(accessed Oct. 12, 2010). This figure includes the FDIC's estimates of its future losses under loss-sharing
agreements that it has entered into with banks acquiring assets of insolvent banks during these eight
quarters. Under a loss-sharing agreement, as a condition of an acquiring bank's agreement to purchase the
assets of an insolvent bank, the FDIC typically agrees to cover 80 percent of an acquiring bank's future
losses on an initial portion of these assets and 95 percent of losses on another portion of assets. See, e.g.,
Federal Deposit Insurance Corporation, Purchase and Assumption Agreement--Whole Bank, All Deposits--Among
FDIC, Receiver of Guaranty Bank, Austin, Texas, Federal Deposit Insurance Corporation and Compass Bank, at 65-
66 (Aug. 21, 2009) (online at www.fdic.gov/bank/individual/failed/guaranty-tx_p_and_a_w_addendum.pdf).
lii Outlays are comprised of the Federal Reserve Mortgage Related Facilities. The Federal Reserve balance sheet
accounts for these facilities under Federal agency debt securities and mortgage-backed securities held by the
Federal Reserve. Board of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1)
(Sept. 30, 2010) (online at www.federalreserve.gov/releases/h41/20100930/). Although the Federal Reserve does
not employ the outlays, loans, and guarantees classification, its accounting clearly separates its mortgage-
related purchasing programs from its liquidity programs. See, e.g., Board of Governors of the Federal Reserve
System, Credit and Liquidity Programs and the Balance Sheet, at 2 (Nov. 2009) (online at
www.federalreserve.gov/monetarypolicy/files/monthlyclbsreport200911.pdf).
As of September 2010, there was $159.6 billion still outstanding under Treasury's GSE Mortgage Backed Securities
Purchase Program. See U.S. Department of the Treasury, MBS Purchase Program: Portfolio by Month (online at
www.financialstability.gov/docs/September%202010%20Portfolio%20by%20month.pdf) (accessed Oct. 5, 2010).
Treasury has received $61.1 billion in principal repayments and $13.9 billion in interest payments from these
securities. U.S. Department of the Treasury, MBS Purchase Program Principal and Interest Received (online at
www.financialstability.gov/docs/September%202010%20MBS%20Principal%20and%20Interest%20Monthly%20Breakout.pdf)
(accessed Oct. 5, 2010).
liii Federal Reserve Liquidity Facilities classified in this table as loans include primary credit, secondary
credit, central bank liquidity swaps, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, loans outstanding to Commercial Paper Funding Facility LLC, seasonal credit, term auction credit,
the Term Asset-Backed Securities Loan Facility, and loans outstanding to Bear Stearns (Maiden Lane LLC). Board
of Governors of the Federal Reserve System, Factors Affecting Reserve Balances (H.4.1) (Sept. 30, 2010)
(online at www.federalreserve.gov/releases/h41/20100930/).
SECTION THREE: OVERSIGHT ACTIVITIES
The Congressional Oversight Panel was established as part
of the Emergency Economic Stabilization Act (EESA) and formed
on November 26, 2008. Since then, the Panel has produced 23
oversight reports, as well as a special report on regulatory
reform, issued on January 29, 2009, and a special report on
farm credit, issued on July 21, 2009. Since the release of the
Panel's September oversight report, the following developments
pertaining to the Panel's oversight of the TARP took place:
The Panel held a hearing in Washington, DC on
September 22, 2010, discussing Treasury's use of its
exceptional contracting authority under EESA. The Panel heard
testimony from Treasury officials, representatives from the
firms that had received the three largest TARP-related
contracts, as well as independent academic and industry
experts.
Upcoming Reports and Hearings
The Panel will release its next oversight report in
November. The report will provide a progress update on
Treasury's foreclosure mitigation programs, the Panel's fourth
full-length report on the topic.
The Panel is planning a hearing in Washington, DC on
October 21, 2010, to discuss the standards and restrictions on
executive compensation for recipients of TARP funds, as
outlined in Section 111 of EESA.\464\ The Panel will hear
testimony from Kenneth Feinberg, former Special Master for TARP
Executive Compensation, as well as various academic and
industry experts.
---------------------------------------------------------------------------
\464\ 12 U.S.C. Sec. 5221. See also U.S. Department of the
Treasury, Executive Compensation (Aug. 3, 2010) (online at
www.financialstability.gov/about/executivecompensation.html).
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The Panel is planning a hearing in Washington, DC on
October 27, 2010, to discuss the topic of the upcoming November
report.
SECTION FOUR: ABOUT THE CONGRESSIONAL OVERSIGHT PANEL
In response to the escalating financial crisis, on October
3, 2008, Congress provided Treasury with the authority to spend
$700 billion to stabilize the U.S. economy, preserve home
ownership, and promote economic growth. Congress created the
Office of Financial Stability (OFS) within Treasury to
implement the TARP. At the same time, Congress created the
Congressional Oversight Panel to ``review the current state of
financial markets and the regulatory system.'' The Panel is
empowered to hold hearings, review official data, and write
reports on actions taken by Treasury and financial institutions
and their effect on the economy. Through regular reports, the
Panel must oversee Treasury's actions, assess the impact of
spending to stabilize the economy, evaluate market
transparency, ensure effective foreclosure mitigation efforts,
and guarantee that Treasury's actions are in the best interests
of the American people. In addition, Congress instructed the
Panel to produce a special report on regulatory reform that
analyzes ``the current state of the regulatory system and its
effectiveness at overseeing the participants in the financial
system and protecting consumers.'' The Panel issued this report
in January 2009. Congress subsequently expanded the Panel's
mandate by directing it to produce a special report on the
availability of credit in the agricultural sector. The report
was issued on July 21, 2009.
On November 14, 2008, Senate Majority Leader Harry Reid and
the Speaker of the House Nancy Pelosi appointed Richard H.
Neiman, Superintendent of Banks for the State of New York,
Damon Silvers, Director of Policy and Special Counsel of the
American Federation of Labor and Congress of Industrial
Organizations (AFL-CIO), and Elizabeth Warren, Leo Gottlieb
Professor of Law at Harvard Law School, to the Panel. With the
appointment on November 19, 2008, of Congressman Jeb Hensarling
to the Panel by House Minority Leader John Boehner, the Panel
had a quorum and met for the first time on November 26, 2008,
electing Professor Warren as its chair. On December 16, 2008,
Senate Minority Leader Mitch McConnell named Senator John E.
Sununu to the Panel. Effective August 10, 2009, Senator Sununu
resigned from the Panel, and on August 20, 2009, Senator
McConnell announced the appointment of Paul Atkins, former
Commissioner of the U.S. Securities and Exchange Commission, to
fill the vacant seat. Effective December 9, 2009, Congressman
Jeb Hensarling resigned from the Panel and House Minority
Leader John Boehner announced the appointment of J. Mark
McWatters to fill the vacant seat. Senate Minority Leader Mitch
McConnell appointed Kenneth Troske, Sturgill Professor of
Economics at the University of Kentucky, to fill the vacancy
created by the resignation of Paul Atkins on May 21, 2010.
Effective September 17, 2010, Elizabeth Warren resigned from
the Panel, and on September 30, 2010, Senate Majority Leader
Harry Reid announced the appointment of Senator Ted Kaufman to
fill the vacant seat. On October 4, 2010, the Panel elected
Senator Kaufman as its chair.