WASHINGTON (Reuters) - The Treasury Department has relied heavily on private companies and troubled mortgage giants Fannie Mae and Freddie Mac to manage the $700 billion Wall Street bailout, a report released on Thursday said.
The report by the congressional panel overseeing the Troubled Asset Relief Program (TARP), said that the $437 million in Treasury contracts to Fannie Mae, Freddie Mac and private companies to manage critical aspects of the bailout program raised a number of concerns about public oversight and conflicts of interest.
“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 report said.
The oversight panel is now headed by Senator Ted Kaufman who took the seat vacated by Elizabeth Warren, who left the panel to oversee the set up of the government’s new Consumer Financial Protection Bureau.
When Fannie Mae and Freddie Mac were placed under government conservatorship in late 2008, officials blamed poor credit choices and bad risk management for their losses.
The Treasury contracts to Fannie Mae and Freddie Mac to manage the Treasury Department’s foreclosure mitigation program have problems, the report said.
“Both Fannie Mae and Freddie Mac have a history of profound corporate mismanagement,” it said. “Further, 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.”
Yet the Treasury Department is relying heavily on them, the report said.
“Fannie Mae alone currently has 600 employees working to fulfill its TARP commitments,” the report said. “By comparison, Treasury has only 220 staffers working on all TARP programs combined.”
Other contracts went to law firms, investment management firms and audit companies, the report said.
“The nature of these firms’ relationship to the financial system inevitably gives rise to a wide range of potential conflict issues,” the report said. “Treasury should develop an independent mechanism for monitoring conflicts that makes it less reliant on contractors and agents for information.”
The report also found fault with Treasury’s outreach to award contracts to small businesses.
“In one case, Treasury awarded a contract to a ‘small disadvantaged business,’ which in turn delegated roughly 80 percent of the contract to a ‘large business,’” it said. But Treasury failed to reach out to find qualified minority-owned businesses to participate in TARP contracts.
Treasury spokesman Mark Paustenbach defended the Treasury’s use of outside contractors, who helped it act more quickly to stabilize financial markets during the financial crisis of late 2008 and early 2009.
“Treasury’s demand for skills, resources and expertise was urgent and we quickly needed qualified assistance,” he said in a statement. “At the same time, our contracting process remains open and transparent.”
The authority to make new government investments in financial firms under TARP expired at the beginning of the month. The Treasury Department has said that what started out as a $700 billion program to stop a financial panic in the fall of 2008 will ultimately cost around $30 billion after selling off its stake in American International Group.