Some Good News on the Stimulus Front

A few months ago, POGO blogged about our concerns that many state and local governments with laws limiting contractors’ campaign contributions (meant to reduce the influence of private interests in the public contracting process) are facing obstacles to enforcing these “pay-to-play” laws on stimulus-funded contracts.  

While none of those obstacles have been removed, the nonprofit, nonpartisan National Institute on Money in State Politics just released an analysis that found little influence of campaign contributions on stimulus contracts. By mashing Recovery.gov data with the Institute’s database of state-level political contributions, it found that “only 3.2 percent of the 3,285 recipients of ARRA-related contracts were also donors to state-level political campaigns during the 2008 and 2009 election cycles.” 

-- Ingrid Drake

Should Taxpayers Say Goodbye to Their Investment in the Auto Industry?

For anyone who is worried about taxpayers fully recouping their $80 billion investment in the auto industry, a report released today by the Government Accountability Office (GAO) will hardly be reassuring.

One major problem, according to financial and industry experts interviewed by the GAO, is that Treasury has conflicting interests stemming from its significant financial stake in the automakers: “Treasury’s general goals of exiting as soon as practicable, maximizing return on investment, and improving the strength and viability of Chrysler and GM are reasonable but possibly competing” (the Congressional Oversight Panel made a similar point in its recent report on the auto industry bailout).

To make matters worse, the GAO raised concerns that Treasury does not have the necessary expertise to navigate these complicated trade-offs:

“Because of the particular needs of the auto companies and the unprecedented nature of providing such assistance, Treasury hired or contracted with a number of individuals with expertise in the auto industry, equity investment, and relevant areas of law...Since those agreements have been finalized and the workload has declined, two-thirds of the original professional staff has left...given the wind-down of the auto team—and the associated loss of dedicated staff with industry- and company-specific knowledge and expertise—we are concerned that Treasury may not have sufficient expertise to actively oversee and protect the government’s ownership interests, including determining when and how to divest these interests.” [Emphasis POGO’s]

As the report points out, Treasury has several options for divesting the government's interests in the automakers, including public sales and private negotiated sales, which could be made all at once or in batches. But no matter what Treasury decides to do, the GAO predicts that taxpayers will end up on the losing end:

Scary Recovery Spending

A ProPublica story recently detailed nearly $30 million in Defense Department contracts awarded under the Recovery Act to companies while “they were under federal criminal investigation on suspicion of defrauding the government.” Some of the companies have since been placed in contracting timeout. Unfortunately, that’s the way the current system works, and with the urgency involved with distributing federal stimulus funds, taxpayer dollars are flying out agency doors to contractors that are being investigated by the government. On the bright side, I haven’t heard of any new money being awarded to contractors on the suspended or debarred list. 

If we had found an instance involving a top contractor being investigated for fraud or similar offenses, it would have been included in POGO’s Federal Contractor Misconduct Database. That begs the question — would it be included in the government’s forthcoming secret Federal Awardee Performance and Integrity Information System (FAPIIS)? Answer: nope. FAPIIS is the congressionally mandated database that is intended to provide government officials with better pre-award information to ensure that taxpayer money doesn’t go to non-responsible contractors. But unfortunately, the scope of FAPIIS was gutted by Congress and as a result, it will only capture a tiny cross-section of the contractors found guilty, liable or that have admitted fault, in criminal, civil, and administrative contract-related proceedings.

It’s kinda scary to think that agencies are still spending their normal appropriations while also spending the hundreds of billions that the government is using to stimulate the economy — all of this occurring with little federal oversight of those expenditures. What a ghostly thought!

-- Scott Amey

SIGTARP Reports That Bailout Accomplishments Came at a Great Cost

A new report released today by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) offers compelling evidence that the government’s bailout programs helped bring the economy back from the brink of collapse. But in tallying up the excessive costs associated with the TARP, the report forces us to consider whether the bailout’s successes have been a Pyrrhic victory for the government and the taxpayer.

As the report points out, some of the bailout’s costs are financial: it is highly unlikely, for instance, that taxpayers will fully recoup their investment from the TARP’s mortgage modification program or from the substantial assistance extended to AIG and the auto companies. But the SIGTARP also argues that we have to look beyond financial costs when analyzing the effectiveness of the bailout.

Moral Hazards and Damaged Credibility

GAO Gives Treasury Its One-Year TARP Checkup

Nearly one year to the day since the Treasury Department announced its first purchase of $250 billion in financial firms’ preferred stock under the Capital Purchase Program (CPP), the GAO has issued a comprehensive report on the ever-evolving Troubled Asset Relief Program (TARP).

For those who haven’t had a chance to read the report yet, the GAO gave Treasury a very mixed review on its implementation of the TARP, and offered plenty of conflicting evidence on how successful the TARP has been at stabilizing the financial system. Here’s what the GAO had to say on the following issues:

BlackRock to the Rescue (Again)

The Wall Street Journal reported this morning that BlackRock is in the running for a new contract to help state insurance regulators perform risk analysis on insurers’ investments, prompting Agnes Crane at Reuters to ask: “Is BlackRock going to rule the world?”

As Crane points out, BlackRock—the country’s largest publicly traded asset management firm—has already enjoyed a cozy relationship with several government agencies that are working to address the financial crisis. At the moment, BlackRock is already providing risk and analytics support for the New York Fed’s $1.25 trillion agency mortgage-backed securities purchase program. BlackRock is also the asset manager for all three of the New York Fed’s Maiden Lane transactions, which were formed to facilitate JPMorgan’s acquisition of Bear Stearns and to restructure the New York Fed’s support to AIG. (A recent New York Times investigation revealed that three of BlackRock’s contracts with the New York Fed were no-bid, including one in which fees were not established until after the contract was awarded.) Finally, BlackRock has raised over $500 million in private capital in order to purchase and manage legacy securities as part of the Treasury Department’s Public-Private Investment Program.

And now, according to the Journal, BlackRock is on a short list of companies that are under consideration to receive a “high-profile” contract from the National Association of Insurance Commissioners (NAIC). If it wins the contract, BlackRock will be analyzing the risk of mortgage-backed bonds owned by insurers, a job previously performed by credit rating agencies, which have fallen out of favor recently due to allegations of inflated ratings.

Another company that is reportedly under consideration for the contract is PIMCO, which has also played a central role in advising the government on its bailout programs, and has been on POGO’s watch list due to its potential conflicts of interest.

To understand why hiring a company like BlackRock or PIMCO could raise the risk for conflicts of interest, just take a look at BlackRock’s latest quarterly SEC filing. As of June 30, 2009, BlackRock is managing a whopping $1.37 trillion in assets, including $510 billion in bonds, $317 billion in cash products, $330 billion in stock funds, and $52 billion in alternative investments such as hedge funds. The company also advises clients on $166 billion in assets, including many of the same types of assets that it would be evaluating for the NAIC. And these numbers will soon be increasing thanks to BlackRock’s recent acquisition of Barclays’ investment unit, which, according to Bloomberg, will create a “company overseeing $2.7 trillion in assets—more than the Federal Reserve.”

A BlackRock spokesperson assured the Journal that the company has “very strict policies and procedures in place to protect confidential client information and manage any potential conflicts of interest.” They’re almost certainly referring to the company’s internal firewalls, which supposedly separate the employees working on the government contracts from the employees managing the firm’s private investments. But in a letter POGO sent to Congress in May, we questioned how effective these firewalls are in protecting the government from conflicts of interest, especially given the magnitude of private investments managed by BlackRock and similar firms.

We certainly understand why the NAIC is fed up with the credit rating agencies, which suffer from their own conflicts of interest since they receive funding from the issuers of the securities they evaluate. But we hope the NAIC will think twice before trusting any risk analysis from a private firm like BlackRock that has a massive financial stake in the market for mortgage-backed bonds.

-- Michael Smallberg

Note to Treasury, Fed: Taxpayers Can Handle the Truth

An audit released Monday by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) determined that Treasury and Fed officials were not entirely forthright when explaining their decision to inject over $100 billion in capital to nine major financial institutions last fall. As a result, the SIGTARP concluded that these officials have eroded the confidence of the very stakeholders whose support the government needs to effectively stabilize the financial system.

This finding will probably come as little surprise to those who have spent months demanding more transparency from the Treasury and Fed officials who are managing the government’s complex and erratic bailout programs. Last fall, for instance, POGO expressed bewilderment that the government was launching so many bailout programs without explaining them to the public:

"Whether it is the multi-billion dollar bailout of Wall Street giants; the newly created (and ever-evolving) TARP; the Federal Reserve's additional lending of $2 trillion; calls for both a new economic stimulus package; or an additional $25 billion to the auto industry — not one of these steps has been adequately explained, justified, or documented."

But even if the latest SIGTARP audit doesn't contain any shocking new findings, it does do an excellent job of documenting the misleading statements made by government officials at the height of the financial crisis about the Capital Purchase Program (CPP) and other bailout initiatives.

As the audit describes, shortly after the passage of the Emergency Economic Stabilization Act last fall, Treasury injected capital into nine major financial institutions as part of the CPP (documents obtained by Judicial Watch later revealed that the CEOs of the nine big banks didn't exactly have much say in the matter). These nine institutions — Bank of America, Citigroup, Wells Fargo, JPMorgan Chase, Goldman Sachs, Morgan Stanley, Merrill Lynch, State Street Corporation, and Bank of New York Mellon — held more than $11 trillion in assets, and received a total of $125 billion in CPP funds.

The CPP was sold to the public as a program to inject capital into healthy firms that needed a little extra assistance to weather the storm of the financial crisis. Here's Treasury's official description: "Through the CPP, Treasury will invest up to $250 billion in U.S. banks that are healthy, but desire an extra layer of capital for stability or lending." And last fall, Treasury and Fed officials made numerous public statements to reassure the public that the first nine banks to receive CPP funds were in a state of financial health. On October 14, 2008, then-Treasury Secretary Hank Paulson stated that "these are healthy institutions, and they have taken this step for the good of the U.S. economy." A joint statement released the same day by Treasury, the Fed, and the FDIC hammered home the same point: "we appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy."

Over the next few months, however, we would learn that some of these institutions were actually on their deathbed. Bank of America had to come back for an additional $20 billion through the Targeted Investment Program (TIP), and Treasury, the Fed, and the FDIC agreed to provide a backstop for a pool of $118 billion of the bank's assets under the Asset Guarantee Program (AGP). Citigroup also received $20 billion in TIP funds, and the government agreed to provide a backstop for a pool of $301 billion of its assets under the AGP. In addition, one of the nine banks ended up acquiring another in the highly controversial Bank of America-Merrill Lynch merger.

Since that time, Fed and Treasury officials have changed their tune about the reasons for distributing the initial CPP funds to these nine institutions. See if you can reconcile these three statements made to SIGTARP in its latest audit (emphasis POGO's):

Public-Private Partnerships Are Set to Begin, but Will the Public Really Benefit?

The controversial Public-Private Investment Program (PPIP)—in which the government is partnering with private investors to purchase the toxic loans and securities that are clogging up the balance sheets of many financial firms—is finally ready to begin. The Treasury Department has announced that five of the nine asset managers selected for the PPIP’s Legacy Securities Program have each raised at least $500 million in equity from private investors, the minimum required to get official approval. This commitment in private equity will be combined with equity and debt financing from Treasury to form the Public-Private Investment Funds (PPIFs) that will be purchasing and managing the legacy securities.

The five asset managers that passed this initial hurdle are: Invesco Ltd., The TCW Group, AllianceBernstein, BlackRock, and Wellington Management Company. These firms have raised a combined $3.07 billion in private equity, which will be combined with the equity and debt financing provided by Treasury to give the PPIFs a grand total of $12.27 billion in purchasing power. Officials expect that the remaining four firms will raise the necessary capital by the end of the month.

For those who have been following the bailout closely, hearing the names of these firms will probably ring a bell. That’s because many of the PPIP asset managers are already working in other capacities to administer the government’s highly complex bailout programs. BlackRock and Wellington are both investment managers for the New York Fed’s $1.25 trillion agency mortgage-backed securities purchase program. BlackRock is also an asset manager for all three of the New York Fed’s Maiden Lane facilities. And AllianceBernstein is a manager of assets received by Treasury under the Troubled Asset Relief Program (TARP).

Although the PPIP has been scaled back since it was first announced, Treasury is still setting aside $30 billion in TARP funds for the program, in hopes that it will reignite the market for real estate-related assets, facilitate price discovery, increase investor confidence in the firms that carry these assets, and encourage the firms to increase lending to consumers and small businesses. But now that the first wave of private fund managers has been given the green light to purchase legacy securities, we wonder if the program will have as much impact as Treasury claims, and if the public really stands to benefit from these “partnerships.” As POGO and others have repeatedly pointed out, there are still a host of unresolved issues related to the PPIP:

How to Catch the Next Madoff

Thanks to a series of Congressional hearings and a scathing 457-page report by the Securities and Exchange Commission (SEC) Inspector General (IG), we now have a pretty good idea of how the SEC failed to detect the infamous Bernie Madoff Ponzi scheme (inexperienced staff, investigations with an overly narrow focus, a failure to thoroughly investigate credible tips and complaints, poor supervision by senior management, a lack of communication between the various SEC offices investigating the case, an inexplicable failure to verify Madoff’s trading with an independent third party, a culture of deference to Wall Street, etc.). At one hearing, Harry Markopolos—a financial analyst and fraud examiner who tried several times to tip the SEC off about Madoff—told Congress that the “SEC staff was not capable of finding ice cream at a Dairy Queen” and that the SEC attorneys couldn’t “find steak at an Outback.”

Now the million dollar (or $65 billion) question is: how do we actually turn things around at the SEC so that it can once again become a “junkyard” watchdog capable of protecting investors from the next big Ponzi scheme?

Yesterday, the SEC IG issued two follow-up reports with a whopping 58 recommendations for improving the SEC’s investigative and enforcement practices in the wake of the agency’s massive failure in the Madoff case. Near and dear to our heart were the numerous recommendations for improving the agency’s handling of whistleblower tips and complaints. For example:

TARP Turns One Year Old, but Still Experiencing Growing Pains

The one-year anniversaries of the collapse of Lehman Brothers and the passage of the Emergency Economic Stabilization Act have provoked a good deal of soul-searching and reflection on the state of the economy and the effectiveness of the government’s massive bailout programs. At a hearing held yesterday by the Senate Committee on Banking, Housing, and Urban Affairs, Assistant Secretary for Financial Stability Herbert Allison, Jr. acknowledged that “the financial system remains fragile,” although he tried to make the case that the Treasury Department has made significant progress stabilizing the system, restarting the credit market, and extending relief to distressed homeowners. 

Subsequent testimony by a trio of TARP watchdogs—Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Neil Barofsky, Chair of the Congressional Oversight Panel Elizabeth Warren, and Comptroller General Gene Dodaro—provided additional encouraging signs that the bailout has helped bring the economy back from the brink. But the watchdogs also reported that Treasury is continuing to ignore some fairly basic recommendations that would make the bailout programs more transparent and accountable (Barofsky testified that “Treasury’s basic attitude towards transparency...remains a significant frustration”). By refusing to implement these recommendations, Treasury has made it exceedingly difficult for outside stakeholders to evaluate whether or not the bailout has been successful.

POGO hasn’t taken a stand on the strategic merits of the TARP. But based on yesterday’s hearing and previous reports issued by the TARP watchdogs, here are some of the best recommendations we’ve heard to make Treasury’s bailout programs more transparent and accountable in year two: