The Project On Government Oversight (POGO) Blog

Highlights from Today's TARP Oversight Hearing

Sen. Max Baucus (D-MT), Chair of the Senate Finance Committee, made a sobering observation in his opening statement at today's hearing on "TARP Oversight: A Six Month Update":

One of our witnesses today, the Special Inspector General for the Troubled Assets Relief Program, has calculated that, in the TARP and associated programs, taxpayers are potentially at risk for about $2.9 trillion. $2.9 trillion is just short of what the entire Federal Government spent in fiscal year 2008. It's like having a second United States Government budget, dedicated solely to saving the financial system. And that is truly surreal.

With trillions of taxpayer dollars on the line, the need for rigorous oversight is greater than ever before. After listening to testimony from the three witnesses--Neil Barofsky, Special IG for the TARP; Elizabeth Warren, Chair of the Congressional Oversight Panel; and Gene Dodaro, Acting Comptroller General of the GAO--we're glad to say that the oversight bodies are at least asking the right questions. But we're deeply concerned that, half a year into the government's unprecedented bailout, the Treasury Department still appears to be dragging its feet in responding to these oversight bodies, leaving Congress and the public in the dark about its plans to stabilize the nation's financial system.

From our perspective, there were several highlights from today's hearing.

We May Soon Know What Happened to LANL's Lost Computers

Representatives Joe Barton (R-TX), Ranking Member of the House Energy and Commerce Committee, and Greg Walden (R-OR), Ranking Member of the House Oversight and Investigations Subcommittee, wrote to the National Nuclear Security Administration (NNSA) on Friday to get to the bottom of what happened at Los Alamos National Laboratory (LANL) and to correct cyber-security and monitoring problems in the wake of reports of at least 67 missing computers at LANL.

While the letter does not mention that POGO released the internal memo that broke the news of the missing computers, or that a LANL BlackBerry was recently lost in a "sensitive foreign country," the Representatives ask some important questions, such as: What is the status of the missing computers and their cyber-security implications?

The questions from the Hill also assess the oversight vigor of the NNSA and its site office over LANL's lost property protocols and cyber-security monitoring. POGO is especially interested in what the Committees find, as we are wondering whether or not LANL should receive significant cuts to its FY09 contract performance fees. (LANL was awarded the full available amounts for security in the FY08 Performance Evaluation Plan, even though it may not have been following lost property and cyber-security protocols for missing computers.)

The Members ask that NNSA furnish the information in four weeks.

-- Ingrid Drake

Morning Smoke

Each morning, POGO staffers are greeted by our Director of Operations, Keith Rutter, who tells us to come see him when they're done with their morning smoke and coffee for the current news they need to know (he's an early riser). Today we're introducing “Morning Smoke,” a new feature on the blog where we'll be presenting the news of the day (both important and amusing) from POGO's perspective. Where there's smoke, there's usually fire, right?

If you come across an article that you'd like to see in a future edition of "Morning Smoke," please send it to [email protected].

Enjoy!

PMA Group 'Excel's at Access to Murtha, Document Shows [Center for Public Integrity] - Written by POGO alum Nick Schwellenbach

Oversight Panel Shortchanged in House Budget [The Hill]

Of College Hoops and Lobbying Dollars [Politico]

The Latest Obama Signing Statement [Federal Eye]

Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes [Bloomberg]

Groups Say Stimulus Lobby Rules Are Too Strict [The Hill]

Measuring Stability and Security in Iraq [Department of Defense]

Are Treasury Officials and Contractors Cashing In on the Bailout?

Are you having a hard time making heads or tails of the government's plans to stabilize the nation's financial markets? Wondering how you might be able to capitalize, for instance, on the recently announced Public Private Investment Program? Fear not: officials and contractors from the Treasury Department are here to help.

The Wall Street Journal reported today that former Treasury assistant secretary David Nason has joined Promontory Financial Group as a managing director. As Zachary Roth at TPMMuckraker points out, Nason was "perhaps more intimately involved than any other government policymaker in shaping the details of the government's response to the crisis." In addition to orchestrating Treasury's Troubled Asset Relief Program (TARP), Nason once served as counsel to former SEC Commissioner Paul Atkins.

At Promontory, Nason will be advising clients on "a host of strategic matters, including improving corporate governance, strengthening risk and financial controls, evaluating potential combinations, and meeting regulatory requirements," according to the company's press release. Promontory CEO (and former Comptroller of the Currency) Eugene Ludwig reiterated that Nason "has been intimately involved in crafting many of the initiatives that are now in place to ensure the resilience of the U.S. financial system," and announced that the company is "fortunate indeed to welcome him to Promontory."

Without seeing an ethics opinion, it's hard to say for sure which conflict-of-interest laws and regulations will restrict Nason's post-government involvement with Treasury, and he might not be restricted at all from representing Promontory before other agencies such as the Fed and FDIC. Nonetheless, we're troubled by the rapid transition of a senior Treasury official to a prominent financial consulting firm, and we'll be keeping a close watch on his activities.

And Nason isn't the only one leveraging an insider position to profit from the government's financial stabilization programs. Avi Klein at BailoutSleuth wrote last week that some legal firms advising Treasury on the TARP are also advising their private clients on bailout issues.

For instance, Locke Lord Bissell & Liddell LLP has a contract with Treasury for up to $2 million to “provide expert legal services in support of Treasury investments in private-sector institutions.” The contract clearly states that Treasury did not waive its conflict-of-interest regulations for the firm, and we can't help but note that the scope of work includes handling "closings of EESA investment transactions where existing counsel under Treasury's Capital Purchase Program (CPP) are unable to perform due to conflicts of interest."

And yet Locke Lord has been aggressively promoting its services to private clients seeking advice on bailout issues. The company even created a TARP Group to help clients navigate the "rapidly changing markets and emerging opportunities." They point to their relationship with the government as a selling point: "With members of the TARP Group in every LLB&L office and with numerous contacts in the legislative and executive branches of the Government, the Firm is able to provide the most sophisticated advice and guidance to clients in all areas of the country" (emphasis added).

Many of our commenters would probably be quick to point out that Nason and Locke Lord have every right to offer their expertise to private clients, and just to be clear, we're not saying that any conflict-of-interest laws or regulations have been violated. But with trillions of taxpayer dollars on the table, we have every right to be wary of government officials and contractors taking advantage of their position for private gain, even if they aren't breaking the law.

Why do I have a bad feeling we'll be reading more stories like these in the weeks ahead?

-- Michael Smallberg

Technology and Design Maturity to Knowledge Attainment: The Space Between

Ah, the wicked lies told between program expectations and requirements and their realization. The Government Accountability Office (GAO) just released a report assessing the overall performance of 96 Department of Defense (DoD) programs, examining 47 programs in-depth. Not surprisingly, they found that while "the amount of knowledge that programs attained by key decision points has increased in recent years...most programs still proceed with far less technology, design, and manufacturing knowledge than best practices suggest and face a higher risk of cost increases and schedule delays."

The programs looked at in-depth include many that POGO has been tracking the problems with for years. Most of the programs' charts tracking technology maturity, design and technology maturity, and production, design and technology maturity show that the attainment of product knowledge falls far below DoD's desired knowledge, with the notable exception of Mine Resistant Ambush Protected (MRAP) vehicles:

 

Graphs of the product knowledge for other programs POGO has investigated are below the jump:

En Banc to Retrieve Royalties

With all of the news about taxpayer money flying out to the government, it's nice to hear the news that the Department of Justice is continuing to pursue $53 billion in royalties they claim oil companies owe taxpayers from deepwater drilling in the Gulf of Mexico. Today the government filed a petition for rehearing en banc in Kerr-McGee Oil & Gas Corporation v. the U.S. Department of the Interior with the U.S. Court of Appeals for the Fifth Circuit. The government argues that the Outer Continental Shelf Deep Water Royalty Relief Act of 1995 authorized the Secretary of the Interior to collect royalties on production from oil and gas leases issued in the Gulf between 1996 and 2000 when the price of oil and gas exceeded thresholds specified in the leases. A district court and a panel have both agreed with Kerr-McGee that they do not owe royalties, but the government argues that these readings are "inconsistent with the plain language of the statute, inconsistent with the statutory structure, and inconsistent with normal principles of statutory interpretation."

-- Mandy Smithberger

KBR Employee Fraud Prosecution Ends With a Whimper

For four years, the Department of Justice had been touting the case of former KBR employee Jeff Alex Mazon as one of “major fraud.” This week, the case reached a conclusion with barely a mention in the press. Those who followed the case were exposed to the ugly side of Iraq contracting and are left wondering how effective the government has been, or even can be, in cleaning up the system.

Mazon, a KBR contracting official stationed in Kuwait, had been accused of rigging a subcontract under the U.S. Army’s LOGCAP (Logistics Civil Augmentation Program) III prime contract in 2003 to unjustly favor a Kuwaiti company and cheat the government of more than $3.5 million in exchange for a seven-figure bribe. Both he and the managing partner of the Kuwaiti company were charged with ten counts of fraud. The prosecution had a parade of witnesses who would testify about the rampant mismanagement and conflicts of interest occurring under LOGCAP III.

Yet two trials in 2008 resulted in deadlocked juries. According to journalist Ray Hanania, who covered both trials at a federal court in Peroria, Illinois, "it was clear to me that the evidence presented by the government was sketchy and circumstantial."

Finally, on Wednesday, the DOJ announced that, in lieu of a third trial, Mazon agreed to plea guilty to one misdemeanor count of making a false written statement. At his sentencing, the government will recommend a one-year term of supervised release with home confinement for the first six months. Of course, KBR, which had its own share of legal troubles recently, is still very much thriving.

While covering Mazon’s second trial last October, Hanania made an observation that deserves to be repeated here. “First Assistant U.S. Attorney and lead prosecutor Jeffrey B. Lang sought to paint Mazon as a crook,” wrote Hanania. “But the prosecution opened the door to larger issues of widespread ethical misconduct by everyone around Mazon that seemed commonplace in the war effort.”

POGO hopes that as President Obama shifts the center of focus in the War on Terror from Iraq to Afghanistan that this kind of misconduct will not follow.  Hopefully, the recommendations POGO offered in its testimony to the House Committee on Oversight and Government Reform can at least partly address the problem.

-- Neil Gordon

Focusing on Spare Parts

When POGO first started as the Project on Military Procurement, we tackled the problems with defense procurement through the lens of spare parts because while most people aren't sure what a fighter plane should cost, anyone can feel confident that a coffee maker shouldn't cost $7600 (even today’s choosey chefs draw the line at $2k). With the exception of a few examples, spare parts are rarely discussed anymore. But it's not because they don't matter. As POGO Executive Director Danielle Brian said at Cato's Can the Pentagon Be Fixed event:

The fact that we aren't hearing about overpriced spare parts--and remember that weapons systems are simply overpriced spare parts flying in close formation--is not because they aren't happening anymore. We aren't hearing about them because in the 90's, the contracting system was radically changed to remove the "red tape" of oversight and transparency so that we can no longer see cost and pricing data. This mentality led to both the C-17 and the C-130J cargo planes being bought through "commercial contracts" as though there had been free market forces determining their prices. But how many of you have found these military cargo planes at Walmart?

But in addition to costs, there have been several news reports in the past few weeks about weaknesses in parts grounding planes. First it was the C-130 Hercules, and now Defense Tech is reporting that a loose bolt found near a MV-22 Osprey rotor in Iraq has grounded the whole fleet. The DEW Line is reporting that the problems on the Osprey are probably due to a safety-critical design flaw, rather than shoddy maintenance.

The spare parts lens may sometimes seem like missing the forest for the trees, but these latest reports show that the parts make up an important part of the strategic whole.

-- Mandy Smithberger

New Acquisition Czar Nominee Seems to Get the Problems with Weapons Acquisitions

The Senate Armed Services confirmation hearing for Dr. Ashton B. Carter for Under Secretary of Defense for Acquisition, Technology, and Logistics, Dr. James N. Miller, Jr. for Deputy Under Secretary of Defense for Policy, and Ambassador Alexander R. Vershbow for Assistant Secretary of Defense for International Security Affairs just wrapped up a little while ago. A couple of notes on the hearing for those who missed it:

- Perhaps the most exciting note, consistent with the rumors swirling around in the press, was Dr. Carter saying he will consider cutting programs as he does a "program by program" review. As he said in his advance questions: "If the Department has done its job properly, the cancellation of a multiyear contract should be a rare event. However, there are circumstances under when it could occur. One such event would be the failure to fund a program year. Another would be the failure of the contractor to perform, which ultimately would lead to a decision to terminate for default" (emphasis POGO’s). Additionally, he believes that the Nunn-McCurdy provision already provides the authority to terminate a program breaches this provision.

- Many of the Senators were concerned about getting adequate competition for contracts, given the concentration of the defense industry. Dr. Carter frequently said that competition is the best management tool--"the great discipliner"--in ensuring that the Defense Department and taxpayers get what they need at a reasonable price--we certainly don't disagree. On this note, NextGov's twitter feed points out that President Obama was challenged about the issue of unbundling contracts in order to increase competition in all contracting. Again, something POGO's a big proponent of. President Obama said it's not something we're going to be able to do on everything.

- Dr. Carter said he would support treating missile defense like an acquisition program, which would mean that it would have to meet testing milestones before it could expand.

- When Senator John McCain (R-AZ) asked Dr. Carter about using fixed price contracts, he said that should certainly be the Department's aspiration for programs that have reached maturity.

- Not surprisingly, there was a lot of discussion surrounding the Weapon Systems Acquisition Reform Act of 2009 (S. 454), introduced by Sens. Carl Levin (D-MI) and McCain. Senator McCain said that he doesn't even believe the bill gets at the "magnitude of the problem," including the need for a culture change at DoD. Dr. Carter said that he thought that the proposed legislation addressed many of the problems that occur in the earlier stages of the procurement process, but agreed that there is much more to be done. In the advance questions, Dr. Carter said that he is not satisfied that technology readiness assessments adequately address systems integration and engineering issues at this point in the process that are considered to be the the cause of many cost overruns and schedule delays: "If confirmed, I will direct the appropriate USD(AT&L) offices to ensure that systems integration, systems engineering, and technology maturity issues are properly addressed and coordinated."

Dr. Carter seems to know the challenges he faces. Only time will tell if he can meet them, but we wish him luck.

-- Mandy Smithberger

Congress Finally Throws a Bone to TARP Watchdog

After months of waiting, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), will finally be given the resources and authority he needs to keep a close watch on the bailout.

This afternoon the House passed the Special Inspector General for the Troubled Asset Relief Program Act of 2009 by a vote of 423-0. The bill, which was originally introduced in the Senate by Claire McCaskill (D-MO), clarifies Barofsky's authority to investigate a wide range of expenditures under the ever-changing TARP. It also gives him the authority to quickly hire new employees and retired government auditors (as we recommended in our recently released IG accountability report).

Barofsky certainly has his work cut out for him, as Treasury recently introduced an ambitious new Public-Private Investment Program to deal with those pesky toxic legacy assets, and the public and Congress continue to express outrage over the AIG bonuses and counterparty payments. We hope this bill will finally give him all the tools he needs to get the job done.

(In case you haven't seen it yet, yesterday's profile of Barofsky in the Post is a must-read.)

-- Michael Smallberg

POGO Releases Names of Suspended and Debarred Contractors Profiled in GAO Report

POGO has obtained the names of the companies and individuals that were featured in a February report by the Government Accountability Office, which documented how these companies and individuals were able to receive new federal contracts despite being suspended or debarred.

-- Neil Gordon

Keeping an Eye on the (Goldman Sachs) Prize

Not surprisingly, most of the questions directed at Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner at this morning's hearing before the House Financial Services Committee were focused on one of two issues: 1) why the government failed to place restrictions on the AIG retention bonuses, and 2) what the government can do to regulate institutions like AIG in the future so that they don't become "too big to fail."

But we were glad to hear a few committee members press Bernanke and Geithner on the issues we raised in our March 12 letter--namely, that a lack of transparency in the AIG bailout had created an appearance of favoritism toward Goldman Sachs and other counterparties.

Although he did his best to avoid the question, Geithner eventually admitted to Ranking Member Spencer Bachus (R-AL) that the counterparties were paid back 100 cents on the dollar on what AIG owed them, despite the fact that they had knowingly entered into extremely risky credit-default swap contracts with the insurance company. Geithner--who played a central role in the AIG bailout as president of the New York Fed--claimed that the government "did not have the ability to selectively impose losses on the counterparties."

Later, Rep. Maxine Waters (D-CA), who has faced her own questions about bailout favoritism, asked Geithner about the Goldman Sachs connections. She pointed out (as we did) that former Treasury Secretary Henry Paulson and current Treasury Chief of Staff Mark Patterson are both Goldman alumni. This issue might come into play again, as Geithner didn't rule out the possibility that Goldman could be one of five firms hired to manage Treasury's public-private partnership program.

On a related note, Rep. Brad Miller (D-NC) asked whether it was appropriate to place former Goldman director Edward Liddy at the head of AIG:

"I don't suspect for a second that he has personally profited in any way by any decision that he has made....But he was also, at the time he accepted the position, on the board of Goldman Sachs, had been for more than five years, had been chairman of the Audit Committee, presumably was involved in decisions about valuing the counterparty positions on credit-default swap contracts with AIG-FP. Was there any discussion about whether appointing Mr. Liddy created issues of appearances and about whether he really brought in the detachment and the fresh eyes that was needed?"

Although Geithner maintained that Liddy is "exceptionally qualified" and has only been "serving the interest of the American taxpayer and helping that company dig out of this mess," Miller correctly pointed out that even the appearance of impropriety can be plenty harmful.

The media has also continued to report on the exceptional aid Goldman Sachs has received, both through the AIG bailout and other forms of taxpayer assistance. This task became a lot easier last week when AIG finally agreed to release more information on its counterparties. Bloomberg News reported this morning that Treasury, through its rescue of AIG, preserved a payday for the top five counterparties (including Goldman) that was worth almost 200 times the bonuses paid to AIG executives. And while Goldman officials still maintain that they hedged their exposure to AIG, TPMMuckraker and others have calculated that Goldman received some $13 billion through the AIG bailout. And that's not counting the additional $10 billion Goldman received through Treasury's Troubled Asset Relief Program (TARP), although company officials say they're hoping to pay back the TARP money within the next month.

In the meantime, Rep. Elijah Cummings (D-MD) has asked Neil Barofsky, the Special IG for the TARP, to conduct a full investigation into the counterparty payments. Even with his limited staff and resources, we hope that Barofsky can fill in the missing pieces of the puzzle, including a complete description of the role Goldman played in the AIG bailout.

-- Michael Smallberg