Treasury Moves Quickly to Recruit Private Bailout Managers

By Robert O'Harrow Jr.
Washington Post Staff Writer
Wednesday, October 8, 2008

The Treasury Department this week plans to start outsourcing the management of up to $700 billion in troubled securities, using special contracting authorities that enable it to retain private portfolio managers, custodians and other financial services consultants without following standard acquisition procedures.

The department's quick turn to the private sector will help it prepare for the massive task of overseeing mortgages and other financial assets to be acquired by the government as part of the Emergency Economic Stabilization Act that was approved by Congress and signed by President Bush on Friday.

But it means that the government has little time to assess the companies that will be partners in what could become one of the largest public-sector funds in American history. Some of the same firms that have played roles in the rise and collapse of the mortgage-backed securities market may end up guiding the government as the bailout unfolds, department officials said.

Contracting specialists said the department has the authority to retain "financial agents" to manage money on its behalf. By using that authority at a rapid clip, instead of through traditional acquisition procedures, the government creates a risk that it won't hire the best firms at the best price, they said.

In this case, the department issued requests for proposals on Monday and expects to being hiring advisers as soon as Friday.

"The upside is the flexibility," said Alan Chvotkin, executive vice president of the Professional Services Council, a trade group representing government contractors. "The downside is unclear requirements and foreclosing robust competition among potential asset managers."

D. Kent Goodger, a contracting official for four decades who now teaches procurement classes for the federal government, said decisions to bypass federal acquisition regulations for urgent and compelling reasons in the past has led to trouble and cost overruns. "By rushing ahead, doing this quickly, it creates inherent risks," Goodger said. "I just hope they're going to be doing this in a secure, professional manner."

An analysis by Taxpayers for Common Sense, a watchdog group, found that the government's use of private firms during the resolution of the savings-and-loan crisis two decades ago lead to "untrammeled payouts to the private sector and reprimands from Congress and the Government Accountability Office."

Treasury officials consider their process competitive, despite what they acknowledge as an "aggressive" timetable. They said firms responding with proposals will receive close scrutiny to ensure that the department gets the help it needs. One official predicted that the department will get below-market rates for services because of the huge volume of securities involved in the bailout.

Another department official said that they're moving quickly because they must.

"Frankly, there is no alternative in this case," the Treasury official said on condition of anonymity because he was not authorized to speak to the media. "This is an emergency act and Congress is expecting us to act quickly."

On Monday, the department issued three solicitations to financial firms for proposals to help the "effective implementation" of the Troubled Asset Relief Program that was authorized by the bailout legislation. The solicitations required responses by 5 p.m. today.

The first seeks input from firms willing to provide "custodian, accounting, auction management and other infrastructure services." The winning firm would provide services for the entire portfolio of mortgage-related securities and mortgage loans. Those services would include asset pricing, cash management and management reporting. Department officials said they could choose their firms as soon as Friday.

Two other solicitations seek firms to manage securities and whole loan asset management services. The portfolios under their management "may reach several hundred billion dollars," solicitation documents said.

The department may begin choosing those firms as soon as next week, an official said.

Some financial firms are worried about conflicts of interest, according to Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a group that represents the top financial services firms. For example: Can an asset manager working for the government also sell troubled assets to the government?

Treasury spokeswoman Michele Davis said: "We expect that [issue] to be clarified in the conflict mitigation plans."

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