Watchdog: Treasury outsourced most bailout work

[October 14, 2010]  WASHINGTON (AP) -- The bailed-out mortgage companies hired by the Treasury Department to manage its main program designed to prevent foreclosures probably weren't up to the job, and tapping them may have increased taxpayer losses, a new watchdog report says.

Failed mortgage giants Fannie Mae and Freddie Mac relied heavily on subcontractors to manage a program aimed at lowering borrowers' monthly payments, according to a report Thursday from the Congressional Oversight Panel monitoring the $700 billion financial bailout. The job probably detracted from their efforts to right themselves financially and minimize the size of their bailouts, which total $148 billion and are likely to grow, the report says.

Treasury hired them despite their history of mismanagement, the report adds. It says they have misreported key data and missed important deadlines.

The report also details how Treasury outsourced most of the work under the $700 billion bailout to private companies. It says Treasury awarded 96 contracts worth up to $436.7 million. The contracts awarded to Fannie and Freddie were by far the largest.

The report mostly praises Treasury's management of companies it hired to run bailout programs. But it raises questions about the opaque subcontracting process, which allowed work designated for small businesses to be farmed out to big companies.

The report says Treasury ably vetted contractors, oversaw their work and assessed possible conflicts of interest. Such conflicts were expected, because Treasury tapped legal experts and money managers to save a financial system that they worked in during normal times.

"These private businesses do not take an oath of office, nor do they stand for election," the report says. "They may have conflicts of interest, are not directly responsible to the public, and are not subject to the same disclosure requirements as government actors," it says.

Treasury spokesman Mark Paustenbach said the contracting decisions were made with necessary haste.

"In late 2008, Treasury had to stand up a major new initiative that helped stabilize the financial markets and began the process of economic recovery," he said in a statement. "Treasury's demand for skills, resources and expertise was urgent and we quickly needed qualified assistance. At the same time, our contracting process remains open and transparent."

Under the 2008 bailout law, Treasury was allowed to bypass normal government contracting procedures. But the department chose to employ stronger oversight than was legally required, the report found. It says Treasury chose to put projects out for competitive bidding, and strictly monitored contractors' performance.

However, the report raises questions about the subcontracts awarded by some contractors. It says Treasury should publish more information about contracts arranged by companies it hires. It notes that Treasury awarded a contract to a "small disadvantaged business," which in turn hired a big company to do 80 percent of the work.

The report's sharpest criticism comes in its discussion of Treasury's complex relationship with Fannie and Freddie. The mortgage giants serve a critical role in the mortgage market by buying loans from lenders and reselling them to investors. They were put under government control in 2008 after too many loans lost value. Their rescue will likely be the most costly of all the bailouts.

Treasury hired the companies to run a program aimed at preventing foreclosures by giving cash incentives to companies that lowered borrowers' monthly payments. Their contracts are worth up to $216 million -- about half the total value of contracts awarded under the bailouts.

The report questions Treasury's judgment that the companies were the only candidates capable of setting up such a program quickly. It says their reliance on subcontractors suggests they didn't have the resources to do the job.

It also points to inevitable conflicts of interest for the companies. Their duties to minimize bailout losses for taxpayers could lead them to use information about the mortgage program. But their contracts with Treasury obliged them to keep the information confidential, and not use it for private gain.

"The fundamental issue with Fannie Mae and Freddie Mac in their roles as financial agents is whether they are simply extensions of the federal government itself," the report says. It says their legal status as private companies could create "vast and unmanageable conflicts of interest."

But the report notes that the companies' contracts with Treasury do not include any profits. That suggests they are being treated more like arms of the government, it says.

[Associated Press; By DANIEL WAGNER]

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