By Peter Whoriskey and Amit R. Paley
Washington Post Staff Writers
Wednesday, October 15, 2008
The Bank of New York Mellon has been selected as the lead contractor in the government's efforts to buy up toxic securities that have spawned fear in the financial markets, a mammoth task considered a key to the Treasury Department's plan to restart the nation's credit markets.
Under the contract announced yesterday, the bank will run the auctions used by the government to acquire the assets, including many linked to troubled mortgages. Bank of New York Mellon will then hold, track and value those securities.
A firm with a conservative business reputation and historic ties to the U.S. government, the bank is the custodian for $23 trillion in investments and has a lot of experience in financial auctions. Those attributes make it well-suited to the complex task it faces in the rescue plan, financial analysts said.
"They are not a traditional bank," said Robert A. Lee, managing director of financial services firm Keefe, Bruyette & Woods. "The lion's share of their business is providing the infrastructure and plumbing around the financial system."
The Treasury Department released a copy of the contract, but the monthly fees the bank will receive were blacked out. They will be announced in a matter of weeks, Treasury officials said, once other contracts related to the $700 billion rescue plan have been negotiated.
"Our market leadership and experience have given us a keen understanding of the challenges facing the U.S. Treasury in these extraordinary times," Robert P. Kelly, the bank's chairman and chief executive said in a statement. "We will immediately deploy our resources and expertise, joining the team of public and private organizations that are working hard to earn the trust of the American taxpayers."
The contract award comes just a day after the Treasury Department compelled the Bank of New York Mellon to take a $2 billion infusion of federal cash in exchange for preferred stock. Eight other major banks were similarly strong-armed into joining the program.
Even as Treasury officials have focused their efforts in recent days on investing directly in banks, the government is pressing ahead with the previously announced plan to buy faltering securities and loans from financial firms.
Bank of New York Mellon will run the auctions, and other firms, not yet announced, will manage and sell the mortgage-backed securities and mortgage loans the Treasury will acquire.
Seventy companies competed for the contract, 10 met the eligibility requirements and three made presentations to the Treasury, department officials said.
"This is the firm which will hold and track the assets we purchase as well as run and report on the auctions we use to buy assets," said Neel Kashkari, the interim assistant secretary for financial stability said Monday before the selection was announced. "Think of this as the prime contractor of the purchase program."
Bank of New York Mellon boasts strong ties to the country's financial history. Its founder, Alexander Hamilton, was the first secretary of the Treasury, and Andrew Mellon, another bank leader, served as Treasury secretary during three presidential administrations leading up to the Depression: Harding, Coolidge and Hoover.
Analysts praised Bank of New York Mellon, which with State Street is among the top providers of custodial services -- basically handling the safekeeping, accounting and reporting tasks for large investments.
"They are one of the el primo banks in the custodial community," said Bart Narter, senior vice president of banking for Celent, a strategy consulting firm.
Lee, of Keefe, Bruyette & Woods, said the bank has extensive experience with keeping records on corporate shareholders, acting as a corporate trustee, managing executive compensation programs and holding securities auctions.
He said that there would naturally be potential conflicts of interest because of assets and services provided by the bank's subsidiaries but added that it had experience handling them in the past.
"They have a lot of cases where their client in one area of their business competes with them in another," he said. "But their customers obviously have confidence that there is not a problem there."
Separately, the Federal Reserve announced that Pacific Investment Management, which runs the world's largest bond fund, would manage a government effort to buy commercial paper, the short-term loans that are a key source of day-to-day funding for corporations. State Street Bank will serve as custodian of the assets, the Fed said.
Also yesterday, the chief of the Government Accountability Office, the investigative arm of Congress charged with oversight of the Treasury bailout program, briefed lawmakers on the monitoring his agency had carried out so far.
Acting Comptroller General Gene Dodaro said the agency has about 20 people monitoring the program who have been spending time at the Treasury building.
Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, said he was pleased with how seriously the GAO appeared to be taking its oversight responsibility.
He noted that guidelines for conflicts of interest were rigorous enough that of the five or six law firms the Treasury asked to bid on providing legal advice for the program, only two said they could satisfy the standards and submitted bids. Simpson Thacher was selected as the winner on Friday.
Frank said the challenge in monitoring conflicts of interest would increase shortly once the sales of "toxic securities" began.