The Treasury Department refused to allow one of its contractors to testify during a hearing about transparency among contractors.
The vice chairman of the Congressional Oversight Panel - a key watchdog over the Troubled Asset Relief Program - revealed at a hearing today that the Treasury Department would not allow the panel to question representatives of the law firm Cadwalader, Wickersham & Taft during their Wednesday hearing.
Damon Silvers, who was presiding over the panel's hearing on TARP contractors, said Treasury's decision not to make for questioning was an "obstacle'' to oversight. Silvers led the hearing due to recent resignation of former chair Elizabeth Warren.
Silvers noted that the firm, whose TARP contracts have a listed maximum value of nearly $27.5 million, has also done legal work for several key TARP recipients, including Bank of America Corp., Citigroup Inc, and American International Group Inc.
Treasury officials cited attorney-client privilege as its reason for blocking public testimony by Cadwalader's representatives.
"Lawyers play a very special role which requires them to provide confidential advice to their clients,'' the agency said in a statement that officials read before their own testimony. "It's highly unusual for them to testify in public except for extraordinary circumstances"
Treasury has offered to have the firm brief the COP in private next week.
Leaders of the panel questioned the Treasury Department over contracting procedures, noting that the department has at least 83 different contracts worth $445 million with companies doing work on TARP issues.
While that sum may be relatively low compared to the total value of federal contracts, it raises serious questions about accountability and transparency, panelists said.
Cadwalader has two contracts with Treasury for TARP work. The first, awarded in March 2009, covers legal work related to the government's investments in General Motors Co., Chrysler LLC and other companies in the auto industry that got public aid. The "obligated value'' of that contract is listed on Treasury's TARP website at $23.1 million.
Cadwalader's second contract covers legal work on Treasury's efforts to preserve its investment in TARP recipients that later find themselves in "distressed circumstances.'' That deal has a listed value of $4.38 million.
Silvers also expressed concern that Treasury hired Freddie Mac to work as a compliance officer for its foreclosure mitigation programs, and the company plans to hire 200 people to fulfill the job. That's compared to the 220 Treasury staffers who work an all TARP programs combined.
"Put another way, the vast majority of people working on the TARP today receive their paychecks from companies and not the federal government," Silvers said during his opening remarks of the hearing.
The law that created TARP also allows the Treasury Secretary to waive usual federal acquisition regulations when hiring "financial agents," giving it greater leeway when it solicits business and inks contracts.
Silvers said the large number of outsourced TARP work is concerning, given that private contractors' principal job is to turn a profit and not, necessarily, to serve "the public good."
The high levels of contracting for TARP work also raises questions about "accountability, conflicts of interest, and whether certain work should be performed by the government alone," Silvers said. Contractors are exempted from the Freedom of Information Act and some subcontractors may never be revealed.
Panelist Kenneth Troske added that a firms' business relationship with Treasury could affect the way they are treated by regulators.
Troske also said that the line between a bailout and a contract can be blurry, referencing the Treasury Department's deals with Fannie Mae and Freddie Mac to do work on its mortgage modification programs. The companies are earning more than $215 million combined for work administering and providing oversight on the Making Home Affordable program, which includes the much-criticized Home Affordable Modification Program that seeks to reduce the monthly mortgage payments of homeowners in jeopardy of foreclosure.
Panelist J. Mark McWatters seemed dumbfounded as to why the Treasury Department would enter into contracts with Fannie and Freddie, given that they have been taken over by the government and are on billions of dollars of government life support.
Gary Grippo, deputy assistant secretary for fiscal operations and policy at the Treasury Department, insisted that nobody in the private sector had the operational capacity to handle those jobs.
Fannie Mae is the program administrator for the MHA program. It is tasked with reaching out to homeowners, enrolling mortgage servicers into the program, overseeing the customer service call center known as the HOPE Hotline and keeping records of modifications, among other things.
Freddie Mac, meaninwhile, evaluates servicers' compliance with the program and works to provide quality assurance. Both perform the work at-cost with no markup, their representatives testified.
Grippo emphasized that in those capacities, the two government-sponsored enterprises are not dealing with the sort of portfolio and credit-risk management issues that ran them into the ground. He also seemed to suggest that the fact that the GSEs were already under receivership may have played a role in the decision to hire them.
"Contracting for convenience is never a good idea," testified Scott Amey, general counsel at the Project on Government Oversight, a group that fights corruption and waste.
McWatters suggested that the frequent media coverage of homeowners' frustration dealing with mortgage servicers as they pursue HAMP modifications seems to suggest Freddie's oversight is lacking . Common complaints - which have been documented by BailoutSleuth - include premature foreclosures and lost paperwork by servicers.
"I assure you I'm doing everything in my power... to make sure those complaints are minimized," testified Paul Heran, who runs the compliance program at Freddie Mac. Under questioning by McWatters, Heran admitted that Freddie, which is supposed to ensure servicers are complying with the HAMP program, hasn't faced any negative repercussions from the Treasury Department -- such as non-payment -- for the servicers' mistakes.
Troske also questioned the motives of the two GSEs for doing the work on a non-profit basis, given that they are ostensibly still for-profit businesses. Neither Freddie nor Fannie officials thoroughly explained why they were doing the work at-cost.
Amey, of POGO, testified that just 22 percent of Treasury's $4.8 billion in contracts in fiscal year 2009 were executed with full, open competition. "The majority of TARP contracts have also been a mixed bag, with numerous contracts awareded on a sole source basis or with less than full and open competition," he wrote in his prepared testimony.
And although Treasury posts contracts on its web site, George Washington University law professor Steven Schooner noted in written testimony that those contracts themselves reveal little about how a company was selected, how an agreement was negotiated, or how the parties will resolve performance issues.
Treasury Department officials insisted that they have policies in place to ensure that services obtained through contractors are truly necessary, cost-effective, and won't cause a conflict of interest. Even when services are procured urgently, they said, Treasury requests proposals from as many sources as possible.
Despite its faults, Schooner said, Treasury has generally been more transparent than other agencies, and the reliance on outsourcing is "a government-wide problem."