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Congressional Oversight Panel October 2010 TARP Report Examining Use of Private Contractors

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Congressional Oversight Panel

October 14, 2010

OCTOBER * OVERSIGHT REPORT REPORTExamining Treasurys Use of Financial Crisis * Contracting Authority

*Submitted under Section 125(b)(1) of Title 1 of the Emergency EconomicStabilization Act of 2008, Pub. L. No. 110-343

Table of ContentsExecutive Summary .............................................................................................................5 Section One: A. Background ..............................................................................................................7 B. Provisions that Govern TARP Contracts and Agreements ....................................10 1. EESA.................................................................................................................10 2. Federal Acquisition Regulation ........................................................................11 3. Interim Final Rule on TARP Conflicts of Interest ............................................13 4. Treasurys Internal Policies ..............................................................................16 5. Recommendations by Oversight Bodies ...........................................................16 C. How Treasury Decided What Functions to Outsource ..........................................18 1. In-house vs. Outsourcing Determinations.........................................................18 2. Distinctions Between Financial Agency and Contracting Arrangements.........20 3. Additional Factors Affecting Initial Determinations ........................................20 4. Unique Backdrop Weighed Heavily on Determinations ..................................23 D. Description of Contracts and Agreements .............................................................24 1. Procurement Contracts ......................................................................................26 2. Financial Agency Agreements ..........................................................................34 E. Evaluation of Treasurys Contracting and Agreement Procedures and Process.............................................................................................................38 1. Compliance with Legal Obligations .................................................................38 2. Compliance with Treasurys Internal Controls .................................................40

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3. Evaluation of How Treasury Selects Contractors and Agents ..........................42 4. Evaluation of Treasurys Post-Award Management of Contracts and Agreements ...............................................................................................43 F. Evaluation of Small Business Arrangements .........................................................51 G. Evaluation of Transparency and Accountability....................................................55 1. Transparency .....................................................................................................56 2. Accountability ...................................................................................................60 H. Discussion of Conflicts of Interest .........................................................................62 1. Treasury Gives Preferential Treatment to a Retained Entity ............................63 2. Retained Entity Serves its own Interest and Not the Public Interest ................67 3. Retained Entity Serves its Clients Interest and Not the Public Interest..............................................................................................................68 4. Retained Entity Uses Nonpublic Information to Benefit Itself or its Clients .........................................................................................................69 5. Does the IFR Alleviate Conflicts of Interest? ...................................................70 I. Activities of Other Oversight Bodies .....................................................................71 J. Conclusion and Recommendations ........................................................................72 Annex I: Fannie Mae and Freddie Mac: A Case Study ...............................................75 A. Role of Fannie Mae in HAMP ...............................................................................77 B. Role of Freddie Mac in HAMP ..............................................................................77 C. Analysis of Treasurys Selection of Fannie Mae and Freddie Mac .......................78 D. Discussion of Conflicts of Interest .........................................................................82 E. Evaluation of Small Business Contracting ............................................................86 F. Evaluation of Treasurys Monitoring.....................................................................87 G. Performance Assessment Made Challenging by Insufficient Reporting ...............91

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H. Evaluation of Transparency ...................................................................................91 I. Conclusion .............................................................................................................93 Annex II: Tables ..........................................................................................................96 Section Two: TARP Updates Since Last Report .............................................................121 Section Three: Oversight Activities .................................................................................158 Section Four: About the Congressional Oversight Panel ................................................159

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Executive Summary*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 TARPs 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 contractors 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*

The Panel adopted this report with a 5-0 vote on October 13, 2010.

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contract. In short, as work moves farther and farther from Treasurys 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 minorityowned business. The largest TARP financial agency agreements were those with Fannie Mae and Freddie Mac to provide administration and compliance services for Treasurys 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

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