Conflicts of Interest Abound

There's nothing like starting your week off with some good old-fashioned conflicts of interest, brought to you by the government's trillion-dollar bailout program.

First, we have Pacific Investment Management Co. (PIMCO), which was hired by the Federal Reserve to advise the government on the value of $118 billion of assets--including securities backed by residential and commercial loans--that were guaranteed in the bailout of Bank of America. At the same time, PIMCO has also been investing in these same types of mortgage-backed securities for its clients. Another company that is managing the Fed's mortgage-backed securities purchase program, BlackRock Inc., has also been investing in mortgage-backed debt.

Rep. Scott Garrett (R-NJ) points out the obvious conflict of interest here: "Pimco and others potentially have two masters to serve: the U.S. taxpayer and their own fiduciary obligations to clients."

Bill Gross, CEO of PIMCO, claims that the employees working on the government contract are completely separated from the investment team. But it's worth noting that as early as September 2008, Gross was warning that the government had to start buying mortgage-backed assets in order to avoid a "financial tsunami." Gross even volunteered that PIMCO would work for free to manage this program. Of course, as TPMMuckaker points out, the Fed won't reveal how much it is paying PIMCO to manage the program, or what it's doing to prevent against conflicts of interest. These latest reports only further underscore why it's so important for the Fed to be open and forthcoming about its role in the bailout.

Next, we have a conflict of interest involving one of the oversight bodies that is supposed to be independently investigating the bailout.

TPMMuckraker reported over the weekend that former Senator John Sununu, who serves as one of five members on the Congressional Oversight Panel (COP), recently joined the board of governors of a subsidiary to Bank of New York Mellon, a firm that has been intricately involved with Treasury's Troubled Asset Relief Program (TARP).

Let's review. Bank of New York Mellon has received $3 billion under the TARP's Capital Purchase Program, and could be in line for more. In the meantime, it's also the prime contractor for TARP, responsible for "custodial, accounting, auction management and other infrastructure services." So Sununu now serves on the board of a company that is both administering and receiving bailout funds, while he simultaneously serves on an oversight panel that is supposed to be evaluating the effectiveness of the bailout and valuing Treasury's acquisitions. Also, as TPMMuckraker points out, in the COP's special report on regulatory reform, Sununu "recommended an approach to financial regulation that was more friendly to Wall Street."

With his hands in so many pies, taxpayers have good reason to wonder how Sununu can possibly be an independent presence on the oversight panel.

-- Michael Smallberg

Comments

[KSBR mired]

Mr. Small berg,

You need to be more detail oriented. There is nothing in the docs binding Treasury and B of NY Mellon that cite its role as a "prime contractor." And it is not acting that way. As a matter of fact, last fall Treasury went out of its way to say that the Financial Agents it hired for various roles were not "contractors." They are actually fiduciaries, just like your stock broker or your commercial bank may be vis-a-vis you. And they are not governed by the FAR.
I, too, am bothered that the govt and BNY Mellon won't disclose the fee and the detailed COI mitigation measures. That would help us have more trust and confidence in programs such as TARP. And I agree that Sununu's several attributes are too many to keep him from appearing to have at least potential conflicts-of-interest. BTW, Wall Street sources do say that Treasury bargained really hard on the fee, and was looking for a 50 percent discount on whatever the going rate is for custodian services. I have no idea how it turned out. But there is a cost to BNY. Lots of institutions and investors still need that service, and BNY Mellon would have had to take some number of people off-line its regular business to service the government. It is probably a fair price that the government is paying.