Rampant Use of Private Contractors Means Less Transparency for TARP

Some of the most critical functions of the bailout program are being performed by private contractors that may have conflicts of interest and are not subject to the same disclosure requirements as government agencies, according to a report released today by the government’s bailout watchdog. As many as 96 outside companies helped the government administer the TARP program, and their duties ranged from simply helping the government obtain goods and services to "inherently governmental functions," such as the management of TARP investments.

As a result, “substantial portions of the work performed to effectuate the TARP may be forever shielded from public scrutiny,” noted the Congressional Oversight Panel. These private companies, together with the government-sponsored mortgage giants Fannie Mae and Freddie Mac, hold $437 million in Treasury contracts and agreements.

The transparency concerns were especially significant, given the scale of outside involvement. The report noted, for instance, that Treasury has 220 staffers working on all TARP programs combined, while Fannie Mae -- Treasury’s biggest TARP financial agent -- has almost three times as many employees working to fulfill its program obligations.

Here’s the report on some of the challenges introduced by these contractors and their subcontractors:

Contractors may hire subcontractors, and those subcontracts are not disclosed to the public. Important aspects of a contractor’s 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 contract. In short, as work moves farther and farther from Treasury’s direct control, it becomes less and less transparent and thus impedes accountability.

The potential for conflicts of interest, which the Treasury relied on contractors to self-disclose, was also an issue raised in the report.

For instance, one Treasury contractor, a law firm called Cadwalader, also represented a number of TARP recipients. One of the firm's executives was invited to testify in a September hearing on the Treasury's use of private contractors but declined the invitation, stating that the firm was "willing to provide the Panel with pertinent information provided that the interests of the Firm's clients are not prejudiced."

The report also criticized the Treasury’s agreements with Fannie Mae and Freddie Mac, both of which it said “have a history of profound corporate mismanagement.”

“Both companies have fallen short in aspects of their performance, as Fannie Mae recently made a significant data error in reporting on mortgage redefaults and Freddie Mac has had difficulty meeting its assigned deadlines,” the report said.

Freddie Mac, as we’ve reported, was also tasked with overseeing the government’s loan modification program. It’s done a sloppy job of that, too, according to an earlier report by the special inspector general for the TARP that flagged problems with “unqualified staff” and “inconsistent and incomplete audit workpapers.”

The new report notes Treasury’s awkward position of being both a regulator and a client of Fannie and Freddie:

Treasury may be less likely to expedite meaningful reforms of Fannie Mae and Freddie Mac when it has employed them for combined arrangements of $240.5 million and when these firms agreed to provide their services at cost, receiving no profit from the deals.

The Congressional Oversight Panel isn’t the only one scrutinizing the role of outside contractors in administering the bailout. As we've reported, the Special Inspector General to the TARP program is also examining the way Treasury made some of its contracting decisions.