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S. HRG. 111–901

TREASURY’S USE OF CONTRACTING AUTHORITY
UNDER TARP

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

SEPTEMBER 22, 2010

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TREASURY’S USE OF CONTRACTING AUTHORITY UNDER TARP

S. HRG. 111–901

TREASURY’S USE OF CONTRACTING AUTHORITY
UNDER TARP

HEARING
BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION

SEPTEMBER 22, 2010

Printed for the use of the Congressional Oversight Panel

(

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

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2011

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CONGRESSIONAL OVERSIGHT PANEL
PANEL MEMBERS
DAMON SILVERS, Deputy Chair
RICHARD H. NEIMAN
J. MARK MCWATTERS

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KENNETH R. TROSKE

(II)

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CONTENTS
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Opening Statement of Damon Silvers, Deputy Chair, Congressional Oversight
Panel .....................................................................................................................
Statement of J. Mark McWatters, Member, Congressional Oversight Panel .....
Statement of Kenneth R. Troske, Member, Congressional Oversight Panel ......
Statement of Gary Grippo, Deputy Assistant Secretary for Fiscal Operations
and Policy, U.S. Department of the Treasury ....................................................
Statement of Ronald Backes, Director, Procurement Services, U.S. Department of the Treasury ...........................................................................................
Statement of Joy Cianci, Senior Vice President, Making Home Affordable,
Fannie Mae ...........................................................................................................
Statement of Paul Heran, Program Executive, Making Home Affordable—
Compliance, Freddie Mac ....................................................................................
Statement of Mark Musi, Chief Compliance and Ethics Officer, Bank of
New York Mellon .................................................................................................
Statement of Steven Schooner, Professor of Law and Co-Director of the Government Procurement Law Program, the George Washington University
School of Law ........................................................................................................
Statement of Hon. Scott Amey, General Counsel, Project on Government
Oversight ..............................................................................................................
Statement of Allison Stanger, Russell J. Long ’60 Professor of International
Politics and Economics and Chair of the Political Science Department,
Middlebury College ..............................................................................................

(III)

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TREASURY’S USE OF CONTRACTING
AUTHORITY UNDER THE TARP
WEDNESDAY, SEPTEMBER 22, 2010

U.S. CONGRESS,
CONGRESSIONAL OVERSIGHT PANEL,
Washington, DC.
The Panel met, pursuant to notice, at 10:05 a.m. in room SR–
428A, Russell Senate Office Building, Washington, DC, Damon Silvers, presiding.
Present: Mr. Damon Silvers (presiding), Mr. J. Mark McWatters,
and Dr. Kenneth R. Troske.

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OPENING STATEMENT OF DAMON SILVERS, DEPUTY CHAIR,
CONGRESSIONAL OVERSIGHT PANEL

Mr. SILVERS. Good morning. This hearing of the Congressional
Oversight Panel will now come to order. My name is Damon Silvers
and I am the Deputy Chair of the Congressional Oversight Panel
for the Troubled Asset Relief Program.
I want to begin by noting the absence of our former Chair, Professor Elizabeth Warren, who recently resigned from the Panel to
take on the difficult and important task of establishing a new Consumer Financial Protection Bureau.
The Panel’s work is a joint endeavor and its accomplishments are
shared by all of its members and its very dedicated staff. Even so,
our work would be impossible without the—would have been impossible without the fierce, uncompromising leadership of Professor
Warren. Her insistence that the TARP was created to help every
American, not just those on Wall Street, remains the guiding principle of our work. We owe her a deep debt of gratitude.
On a personal note, let me say that I was often asked in the context of my service on the Panel with Elizabeth what Elizabeth was
like to work with. And I always answered that she is exactly as you
see her when she chairs these hearings: straightforward, publicspirited, generous, and yet exacting.
We will miss her deeply at the Oversight Panel, but our loss is
President Obama’s and our nation’s gain.
We are here today to examine Treasury’s use of private contractors under the TARP. In the minds of most Americans, the TARP
is a government program designed by Congress and paid for by taxpayers to promote a public purpose, the stability of our economy.
But in many ways the TARP today no longer looks like a government program. Many of its most critical functions are managed by
private companies operating under 83 different contracts and
agreements worth about $445 million.
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Congress authorized the TARP program to contract out certain
types of work that would otherwise have been required to be done
by the government itself. To give just one example, Treasury hired
Freddie Mac to serve as the compliance officer for its foreclosure
mitigation programs. To do the job, Freddie Mac plans to hire 200
people. By comparison, TARP has only 220 staffers working on all
TARP programs combined. Put another way, the vast majority of
people working on the TARP today receive their paychecks from
private companies and not the Federal Government.
Private contractors do not take an oath of office, they do not
stand for an election, nor are they subject to civil service rules.
Their goal is to turn a profit, not to advance the public good.
While the emergency situation in the fall of 2008 required the
Treasury to engage the help of private firms to act with the necessary speed, the breadth and depth of the outsourcing involved in
the TARP inevitably raises questions about accountability, conflicts
of interest, and whether certain work should be performed by government alone.
Now, the bulk of TARP’s contracting dollars have been spent on
law firms, investment management firms, and audit firms. The nature of these firms’ relationship to the financial system inevitably
gives rise to a wide range of potential conflict issues, including the
potentials for conflict with these firms’ other clients, self-interested
behavior in the management of TARP contracts, and the potential
for misappropriation of market-relevant information that comes
into contractors’ possession as a result of working for the TARP.
Treasury has, to its credit, taken steps to mitigate these concerns
and provide greater accountability. Most notably, it posts all TARP
contracts to its website. But although this is an important first
step, it is not a complete solution. Contractors are, for example, immune to requests under the Freedom of Information Act. They may
hire subcontractors and those subcontractors need not be disclosed
to the public, nor even to Treasury itself. Important aspects of a
contractor’s work may be buried in work orders that are never published in any form.
In short, as work moves farther and farther from Treasury’s direct control, accountability and transparency to Congress and the
public become more difficult.
Congress recognized this risk when it created the TARP, so it
tasked the Panel with examining Treasury’s use of private contractors. We have considered the issue at length in several of our past
reports and today we are digging even deeper. I hope today that
we will be able to address the following questions:
One, how has Treasury determined what functions associated
with the TARP should be contracted out?
Two, how is Treasury overseeing the performance of TARP contractors?
Three, what measures has Treasury put in place to address contractor conflicts of interest and what has Treasury’s approach been
to potentially disabling conflicts of interest?
We are joined by three panels of witnesses, including representatives from Treasury, the largest TARP contractors, and government
accountability organizations. We are grateful for their presence and
look forward to their testimony.

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Before I turn the gavel—the gavel over to my colleagues on the
Panel, I should note that Superintendent Richard Neiman, our
fourth panelist, is not able to be with us today because of urgent
matters relating to his duties as the Superintendent of Banks for
the state of New York. We miss Superintendent Neiman, but we
are cognizant of the fact that all the Panel members have other duties, and particularly Superintendent Neiman’s to the citizens of
New York for him are at least comparable to those here.
So with that, I would like to offer my colleagues on the Panel an
opportunity to make their own opening remarks. Mr. McWatters.
[The prepared statement of Mr. Silvers follows:]

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STATEMENT OF J. MARK McWATTERS, MEMBER,
CONGRESSIONAL OVERSIGHT PANEL

Mr. MCWATTERS. Thank you, Mr. Silvers. I very much appreciate
the attendance of the witnesses and I look forward to hearing their
views.
The Department of Treasury is authorized under the Emergency
Economic Stabilization Act of 2008 to enter into procurement contracts and financial agency agreements in order to discharge its duties under the statute. Financial agency agreements allow Treasury
to retain private sector businesses to perform inherently governmental and perhaps other functions and procurement contracts are
employed by Treasury to obtain other goods and services from private sector organizations.
Today’s hearing will examine Treasury’s use of procurement contracts and financial agency agreements to obtain services that
Treasury cannot or has chosen not to perform itself. In order to add
some perspective to the materiality of the issues before us today,
it is worth considering that the potential value of procurement contracts between Treasury and third party service providers totals
approximately $400 million, roughly $85 million of which relates to
limited competition contracts issued due to unusual and compelling
urgency.
It will be interesting to learn the circumstances that justified the
issuance of the limited competition contracts, as well as why only
four service providers were awarded approximately $250 million in
potential value procurement contracts.
It is also worth noting that Treasury has entered into financial
agency agreements with Fannie Mae and Freddie Mac that have an
obligated value of approximately $220 million. Since Fannie and
Freddie were all but nationalized in September 2008, it will be interesting to learn why Treasury chose to enter into significant contractual arrangements with two failed government-sponsored enterprises instead of with solvent private sector organizations, and if
Treasury was able to obtain services from the GSEs on an arm’slength basis.
Since Treasury also engaged Fannie and Freddie to modify GSEowned and guaranteed loans, it is critical that the two GSEs address how they mitigated any conflict of interest that has arisen
with respect to their financial agency agreements.
EESA requires Treasury to establish and maintain an effective
system of internal controls to provide reasonable assurance of the
reliability of financial reporting, including financial statements and
other reports for internal and external use. In addition, fundamental questions—fundamental elements of this Panel’s mandate
are to examine the extent to which the information made available
on transactions under the TARP have contributed to market transparency and to ensure that the use of TARP authority is subject
to public accountability.
As such, one goal of today’s hearing is to determine if Treasury,
the procurement contractors, and the financial agents have adopted
a set of best practices with respect to the development and implementation of their internal control systems and have taken such
other necessary and appropriate action so as to ensure market

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transparency and public accountability regarding their procurement contracts and agency agreements.
EESA also requires the Secretary of the Treasury to ensure—to
issue regulations or guidelines necessary to address and manage or
prohibit conflicts of interest that may arise in connection with the
administration and execution of the statute. Although on January
21, 2009, Treasury issued an interim final rule regarding conflicts
of interest arising with respect to procurement contracts and financial agency agreements, several questions remain for our analysis.
For example, real or perceived conflicts of interest may arise
under any of the following four circumstances: Treasury contracts
with a firm and seeks to regulate that firm or industry; Treasury
enters into an arrangement with a contractor or financial agent
and subsequently intends to hire an employee from one or more of
those retained entities; Treasury develops an overreliance on one
specific firm because it has entered into multiple arrangements
with that firm; and fourth, Treasury hires a contractor or financial
agent that needs government support in the future.
It will be helpful to learn this morning how Treasury intends to
address each of these conflicts of interest issues.
Thank you for joining us today and I look forward to our discussion.
Dr. Troske.

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STATEMENT OF KENNETH R. TROSKE, MEMBER,
CONGRESSIONAL OVERSIGHT PANEL

Dr. TROSKE. Thank you, Mr. Silvers.
I would like to start by thanking all the witnesses for agreeing
to come here today. Clearly our job as an Oversight Panel is made
much easier with your help in understanding the issues surrounding TARP and contracting, and I want to let you know that
I appreciate your efforts.
While I recognize that at first glance today’s hearing on TARP’s
exceptional contracting authority does not appear as exciting as
some of the Panel’s previous hearings, I feel once you begin to
study the issues surrounding contracting, including such issues as
when and why the government decides to do work internally versus
hiring an outside contractor, who the government hires as contractors, and the details of contractor compensation, you quickly discover that these issues are fundamentally important for understanding how to create a financial system that is less prone to crisis and less destructive when crises occur.
Through the very act of hiring businesses to work for the Federal
Government, the government may implicitly be providing an advantage to one company relative to its competitors, and this arrangement potentially creates a type of moral hazard that can lead
to problems in the market.
An important issue that seems to have received very little attention is when is it appropriate for the Federal Government to contract with firms that it also regulates? For example, through the
TARP the Treasury is currently contracting with several financial
firms, including BNY-Mellon, Morgan Stanley, and Alliance Bernstein, and the government is often paying them at rates below
what the firm could obtain performing similar work in the private
sector.
These firms often feel, perhaps correctly, that they are doing the
government a favor. Suppose, however, that in the not too distant
future one or several of these firms are found to be in financial distress or are discovered not to be in compliance, complete compliance, with regulations. It is hard to imagine that the current—it
is not hard to imagine that the current or recent work for the government might influence how regulatory authorities deal with the
firms. In turn, this might—this preferential treatment might provide the firm with a distinct advantage over non-contracted competitors in the same situation.
Further, as we all know, various government agencies are writing new rules in response to the recently passed Dodd-Frank Wall
Street Reform and Consumer Protection Act. Again, it would not be
too hard to imagine that because some firms are working for the
agencies that are writing these new rules these firms may have the
ability—have greater influence on the rules than their competitors
who are outside looking in.
Finally, the line is not always clear between bailing out a firm
when it gets into financial difficulty and awarding the firm a government contract. These types of ambiguous actions lead to questions about the government’s ultimate motivation when contracting
with firms such as Freddie Mac and Fannie Mae, which recently
received substantial financial support from the government.

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These are examples of the moral hazards that may be created
when the government hires private sector firms. If this moral hazard is recognized and priced by the market, this advantage is one
more factor that contributes to the creation of systemically risky,
too big to fail, firms. The cost of this moral hazard needs to be considered when weighing the decision of whether certain tasks should
be performed directly by the Federal Government or by outside
contractors.
I want to be clear. I have no reason to suspect that Treasury or
any other government agency has behaved inappropriately and I
think the evidence is that Treasury has bent over backwards to ensure that they are following standard procedures and rules. However, I do believe that issues surrounding when is it appropriate for
government agencies to hire heavily regulated firms as outside contractors or financial agents should be discussed by policymakers,
legislators, and the American public.
For all these reasons, today’s hearing is as important as the
COP’s previous hearings examining the bailout of large banks, the
bailout of AIG, and the use of TARP money to support, funds to
support the auto industry. While I don’t think we are going to develop definitive guidelines for when the government should contract with private sector firms, hopefully the work we do here today
will encourage that important discussion. I’m looking forward to
hearing the thoughts from the witnesses who are appearing before
us today.
Finally, in conclusion, let me echo the comments of Mr. Silvers
regarding Professor Warren. I too have appreciated the service that
she provided to this Panel. On a personal note, I am the newest
member of the Panel and Professor Warren made me very quickly
feel a very welcome and active participant in this Panel and for
that I do thank her.
So thank you very much.
Mr. SILVERS. Thank you, Dr. Troske.
I’m pleased to welcome our first panel, which includes two witnesses from the Department of the Treasury: Gary Grippo, the
Deputy Assistant Secretary for Fiscal Operations and Policy; and
Ronald Backes, the Director of Procurement Services.
However, before we hear testimony from Treasury I would like
to note that we also invited testimony on the next panel from a
representative of Cadwalader, Wickersham & Taft LLP, whom
Treasury contracted with for many of its most significant legal
dealings in the automotive industry, the public-private investment
program, and other aspects of TARP. Treasury declined to allow
Cadwalader to testify, as Cadwalader’s client, objecting to any appearance of Treasury’s attorneys in public hearings in other than
extraordinary circumstances, but agreed to make the firm available
to the Panel for a private meeting.
We disagree with Treasury’s decision to object to their counsel
testifying. We note the obstacles such an approach places to public
oversight of legal contracting in the context of the TARP. The
Panel has requested a comprehensive list of Cadwalader clients
that have received TARP funds from both Cadwalader and from
the Treasury Department. We have yet to receive that list, but we
note that Cadwalader’s website and other public sources list a sig-

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nificant number of current and former TARP recipients as clients
of the firm, including Bank of America, Citigroup, and AIG. We
will be noting the results of this request and of our meeting with
Cadwalader as part of our October report.
With that note, Mr. Grippo, please proceed with your testimony.
Statements are limited to 5 minutes. Proceed.

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STATEMENT OF GARY GRIPPO, DEPUTY ASSISTANT SECRETARY FOR FISCAL OPERATIONS AND POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. GRIPPO. Thank you, Mr. Silvers. In light of the comments on
Cadwalader, I would like, with your permission, to read a statement from the Treasury, this from the General Counsel’s Office of
Treasury:
‘‘The Department of the Treasury strongly supports the important oversight role of the Congressional Oversight Panel in helping
to restore liquidity and stability to the United States financial system. Over the past 22 months, Treasury has complied with every
request for information that we have received from the panel, including numerous interviews, briefings, and document productions.
Treasury staff has spent thousands of hours working with panel
members and their staff.
‘‘In this particular circumstance, the panel requested testimony
from one of the private law firms that represents the Treasury. We
understand and respect the panel’s interest in obtaining information from this law firm. However, lawyers play a very special role
which requires them to provide confidential advice to their clients.
It is highly unusual for them to testify in public except in extraordinary circumstances.
‘‘Therefore, the Treasury has offered a reasonable alternative, a
detailed briefing early next week, which the panel has accepted.
The panel members and their staff will be able to speak to the law
firm, to ask questions, to gather relevant and detailed information,
and to include that information in their public report. We believe
that this briefing fully satisfies the panel’s need for information
and respects the traditional role of outside counsel.’’
Now let me turn to my own opening statement. Members of the
Congressional Oversight Panel, let me thank you for the opportunity to testify today. As the Deputy Assistant Secretary for Fiscal
Operations and Policy at the Treasury, a position which I’ve been
in since July of 2007, I’m responsible for overseeing the financial
agents designated to support the Emergency Economic Stabilization Act.
Financial agents have been instrumental in implementing the
Act and thus in Treasury’s efforts to stabilize the financial system.
To date, the Treasury has designated 15 financial agents, including
commercial banks, broker-dealers, asset managers, and the government-sponsored enterprises, to manage various assets and investments and to help administer the Home Affordable Modification
Program. The Treasury designated these agents pursuant to section 101[c] of the Act, which specifically authorizes the Secretary
of the Treasury to designate financial institutions as financial
agents to carry out the authorities of and perform all reasonable
duties related to the Act. The Act itself defines ‘‘financial institution’’ broadly, to include any such institution, including but not limited to any bank, savings association, security broker or dealer, or
insurance company.
Unlike contracting authority, the authority to designate financial
agents of the United States, both in the Act and in other statutes,
is unique to the Treasury. Unlike an arm’s length contractor selling
goods and services in the market, financial agents are governed by

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the principal-agent relationship, under which a financial institution
is empowered to act for and on behalf of the Treasury as the principal to carry out certain authorities based on a defined scope of
agency.
Financial agents have a fiduciary obligation to the Treasury, including the requirement to act in the best interests of the Treasury
and not in their own interests. Accordingly, only financial agents
and not contractors have been authorized to perform certain duties
under the Act. This approach is consistent with the Treasury’s
longstanding policy of allowing only financial agents and not contractors to hold and manage public moneys.
The decision to designate a financial agent to perform some activity under the Act, as opposed to engaging a contractor, begins
with the consideration of two key questions: One, does the activity
entail the direct management of public assets, such as the purchase, valuation, custody, or disposition of investments or cash?
Two, does the work entail a close collaboration between the Treasury and the provider such that a fiduciary relationship is required?
Financial agents are engaged when the Treasury needs to obtain
the inherent capabilities and special expertise of a financial institution and where the Treasury needs the services of an entity that
can act as an extension of the Treasury.
Although the Treasury uses contractors and financial agents
under different authorities and for different purposes, in both cases
Treasury has the goal of engaging the entity best qualified to perform the function at a price that represents fair value to the taxpayer.
The process for the solicitation, evaluation, and selection of financial agents embodies the best practices for third party sourcing:
openness, fairness, competitiveness, and transparency. We’ve created an Office of Financial Agents with dedicated staff to manage
this process. Moreover, all the financial agent arrangements are designed to encourage and facilitate the involvement of small financial institutions. The notices soliciting financial agents and the
agreements designating financial agents contain evaluation criteria
and requirements related to small financial institutions. Indeed, a
majority of the current financial institutions designated as financial agents to help implement the Act, 8 out of 15, are small institutions, including six institutions that are minority or womenowned.
In addition, the directly designated financial agents have themselves engaged 26 small firms as sub-providers, including 18 that
are minority or women-owned firms. Moreover, 23 small and minority, women, and veteran-owned broker-dealers have participated
as co-managers for the auctions of warrants and the sales of common stock.
We work diligently to identify and prevent any conflicts of interest related to our use of financial agents. In enforcing the TARP
conflicts of interest interim rule, we work with financial agents as
well as independently to identify and mitigate potential organizational and personal conflicts of interest that may arise during the
retention of the agents and during the performance period of their
agreements. With one exception, conflicts of interest mitigation
plans have been in place before work activity begins, the one excep-

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tion being the very first provider hired under TARP, the Bank of
New York Mellon, which had a co-signed mitigation plan within 2
days of signing the agreement. We’ve remained engaged with financial agents to continually assess any new conflicts, to develop
changes to mitigation plans over time.
Let me jump ahead and just indicate that we agree with the
Panel that contracting and engaging Fannie financial agents is extremely important in the administration of the Act, and I want to
thank you for the opportunity to discuss these issues today.
Mr. SILVERS. Thank you, Mr. Grippo. We should note that I extended you the courtesy of some extra time, given that you had a
matter you had to take care of first.
Mr. Backes.

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STATEMENT OF RONALD BACKES, DIRECTOR, PROCUREMENT
SERVICES, U.S. DEPARTMENT OF THE TREASURY

Mr. BACKES. Good morning, members of the Congressional Oversight Panel. Thank you for the opportunity to testify today. As Director of Procurement Services for Treasury’s departmental offices,
a position I’ve held since May of this year, I’m responsible for overseeing contract operations supporting Treasury headquarters and
aligned clients, including the Office of Financial Stability, which
has requirements for contracts that support the Emergency Economic Stabilization Act. From February of 2009 through May of
2010, I served as the contract administration manager for OFS, responsible for implementing and overseeing contract planning and
administration for the Troubled Asset Relief Program, TARP.
I’m here today in response to the Panel’s request to provide an
overview of Treasury’s contracts. Treasury acquires products and
services pursuant to the Federal Acquisition Regulation, or FAR, as
supplemented by agency regulations. Although EESA explicitly authorized the Secretary to waive the FAR to respond to the financial
crisis, we made a deliberate decision not to do so for any TARP
contracts. Treasury has contracted for document management,
legal support, accounting, internal controls, information technology,
and similar services in support of TARP, all using FAR-based procurement methods.
The Government Accountability Office has monitored TARP contracting from the inception of the program and has repeatedly recognized our strengths in this area. Rather than making a choice between doing things fast and doing things right, we chose to do
both.
In the fall and winter of 2008 during the heat of the financial
crisis, we leveraged existing contracts where available, conducted
full and open competitions when feasible, or else limited competitions under the authority of the FAR, to ensure an effective and
timely response to the crisis. We reviewed potential contractors to
ensure they did not have disabling conflicts of interest and maintained acceptable conflict of interest mitigation plans.
As the program matured, OFS developed work requirements beyond those meeting its urgent needs and developed mid- and longrange strategies for contracts to transition to full and open competitions and small business set-asides to meet all the TARP contracting needs. We enhanced existing mechanisms to match con-

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19
tract costs, schedules, and quality, and formalized conflict of interest procedures. OFS developed its acquisition strategy through a
Contract and Agreement Review Board, or CARB, chartered in part
to review long-term requirements for OFS to ensure consistent and
effective planning for contracts and financial agent agreements and
to provide a forum for high-level review of acquisition plans to
achieve OFS mission and regulatory goals.
Before deciding to use contractor services, Treasury addresses
the relevant tradeoffs between contractor and government performance. The decision to acquire contractors through a contract begins
with the consideration of whether the required services are other
than inherently governmental in nature, whether they can be obtained at a competitive price from the private sector without creating an immitigable conflict of interest, and whether it would be
more cost effective for schedule or other reasons to outsource the
work.
The contract selection process entails a competitive solicitation
and evaluation to identify the proposal or proposals that represent
the best value to the Treasury, considering cost and other factors
identified in the solicitation. In the case of most contracts awarded
in the first year in support of the TARP, Treasury either fully competed the work using General Services Administration, GSA, schedule contracts or held limited competitions pursuant to the unusual
and compelling urgency authority of the FAR.
Treasury followed the same basic process for unusual and compelling urgency procurements as for traditional procurements, including the conduct of market research to identify the best qualified firms to whom Treasury released the solicitation, a competitive
evaluation, and consideration of conflicts of interest, if any, prior
to selection.
For conflicts of interest, Treasury reviews the scope of work and
the type of organization that may be selected at the inception of a
contract or task order to identify circumstances that might give
rise to an organizational or personal conflict of interest. Treasury
includes conflict of interest provisions in the resulting contract or
task order. Every offeror seeking a contract for services other than
administrative services, such as building, leased furniture, newspaper subscriptions, and the like, must provide a conflict of interest
mitigation plan and identify actual, potential, or apparent organizational and personal conflicts of interest as part of its proposal.
Treasury reviews the plan and, if appropriate, requires additional
information and a revised conflict of interest mitigation plan. Contracts, including task orders issued under existing contracts, are
not awarded and contract work does not begin unless the associated proposed mitigation plan is determined to be acceptable.
In addition, mitigation plans are revisited and, if necessary, revised if warranted by the circumstances, such as when the business
structure of the contractor changes or when additional work is ordered under the contract.
Treasury employs several layers of internal controls associated
with contract performance, including contracting officer oversight
and monitoring, delegation of day to day monitoring to certify
COTRs, and internal management reviews. In addition, OFS char-

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tered the CARB to review and monitor administration of all OFS
contracts to ensure consistent and effective program management.
As we approach 2 years since the passage of EESA, Treasury has
successfully implemented an effective acquisition strategy that enables delivery of timely support for critical legal, financial, and information technology needs and continues to maximize competition
and small business participation to support——
Mr. SILVERS. Mr. Backes, can you wind up, please.
Mr. BACKES. Yes, I will. Thank you.
Through these actions, as acknowledged by the GAO, Treasury
has strengthened its management and oversight of vendor-related
conflicts, substantially increased the share of work performed by
small businesses under TARP contracts, and put in place clear procedures to address actual, potential, or apparent conflicts that may
arise.
We agree with the Panel that contracting and engaging financial
agents is extremely important in the administration of the EESA,
and I thank you for the opportunity to discuss this today.
[The prepared statement of Messrs. Grippo and Backes follows:]

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Mr. SILVERS. Thank you both for your testimony.
We will now have a round of questions, 5 minutes with each panelist.
Mr. Grippo and Mr. Backes, in each of your areas of operation
can you explain to the Panel how you go about determining what
functions—how you went about and go about determining what
functions in the TARP program are suitable to be executed internally by government personnel and which ones should be
outsourced?
I note—the Panel understands the ‘‘inherently governmental’’
test that applies under traditional contracting. That is sort of obviously not the point in relation to financial agents. But we assume
that there are financial agent-type functions that are done internally. So how do you draw those distinctions? Mr. Grippo first.
Mr. GRIPPO. Sure. Mr. Silvers, there are two or three key criteria. The first is whether the government has or can reasonably
put in place an infrastructure for a particular function. For example, if we need capital markets expertise and we do not have a
trading desk, which we do not, we would naturally look to
outsource that function to a firm that does capital markets trading,
since that is not a function that the Treasury does.
Secondly, we look to whether we need an objective third party to
perform some function. So if we are looking for the valuation of an
asset or advice on potential structurings of an investment where
we really do want independent advice and the public is looking for
us to get independent validation of our actions, we would look to
likely designate a financial agent.
Probably the third criteria, which was most important at the outset of implementing TARP, related to time to market. Given the urgent circumstances of the crisis, it was in many cases best to engage a third party to implement something quickly. So as an example, the Bank of New York Mellon, which we engaged within about
10 days of the passage of the statute, we brought to bear dozens
of individuals to help us begin implementing the Act.
So the criteria are—do we have the infrastructure or not, do we
need an objective or independent third party, and what is the time
to market consideration.
Mr. SILVERS. Thank you.
Mr. Backes.
Mr. BACKES. In the realm of Federal contracts it’s a little more
standard, but at OFS we implemented a Contract and Agreement
Review Board, which I mentioned, which brought essentially the
OFS personnel and executives across Treasury together to contemplate those specific strategies as to whether we would go to insource opportunities, whether we would go to contract or financial
agents, and to deliberate on those, reviewing the short-term need
versus the long-term requirement and what we could do, and review strategies for both, getting it today and getting it in the long
term.
On a case by case basis, each action that is proposed for a contract will have a specific plan, in which we engage in tradeoffs on
whether it makes sense to keep it in house or to go to contract.
Several of the considerations that we engaged in in some of the
deliberation, the ‘‘inherently governmental’’ discussion was promi-

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nent, as well as whether it was available as a non-personal service
contract and precludes us from hiring staff, if you will.
Mr. SILVERS. Can I stop you there for a second. How do you look
at legal services in relation to the framework you’ve laid out? It’s
not money management.
Mr. BACKES. No.
Mr. SILVERS. And the government obviously has a lot of lawyers.
So give me a little insight into that?
Mr. BACKES. Well, legal services weren’t seen as an agent.
They’re let on contract. Legal services are commonly available in
the commercial marketplace. So we looked to law firms where
Treasury didn’t have, at the time, existing Federal expertise within
the Federal workplace.
Mr. SILVERS. So you look more broadly than simply what’s available within the Treasury Department when you make these—when
you go through this type of analysis?
Mr. BACKES. Certainly, certainly.
Mr. SILVERS. But it’s peculiar to me—and perhaps you can explain to me—why you don’t view lawyers as sort of agents with fiduciary—in a sort of fiduciary context. That’s generally how lawyers are understood to operate, although obviously they don’t have
discretion over funds. Can you explain that to me?
Mr. BACKES. We’re not looking at lawyers as individuals.
Mr. SILVERS. Law firms.
Mr. BACKES. When we approach a contract relationship, we look
at whether we can create that arm’s length relationship that would
exist in the commercial marketplace, and we recognize law firms
as within that realm. So we can contract for legal services and then
they’re provided. Those law firms are seen as providing an expertise in a certain area.
Now, I acknowledge your concern in the opening statement that
was made regarding Cadwalader and the special relationship, and
we did have deliberations about that relationship. But we recognized them as available through contract.
Mr. GRIPPO. And, Mr. Silvers, I would just add that the authority
to designate financial agents of the United States, both in the Act
and in other statutes, is limited to financial institutions. So there’s
no statutory authority that I’m aware of that would allow us to legally designate a law firm as an agent or a party standing in our
shoes.
Mr. SILVERS. No, I meant the agent in the generic sense, rather
than in the specific sense. I clearly understand that they are not
within the financial agent space.
With that, my time has expired.
Mr. McWatters.
Mr. MCWATTERS. Thank you.
Gentlemen, Fannie and Freddie failed 2 years ago. They were
bankrupt. They would have been liquidated, closed down, but for
the fact they were taken into conservatorship, something unusual.
The Congressional Budget Office has estimated that the bailout of
those two institutions will cost the taxpayers approximately $389
billion. Given that, given that they have not been managed in the
best way, why award them contracts that total $220 million? Why
not someone else? Why not someone from the private sector?

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Mr. GRIPPO. Simply put, we made a determination that there
were no other parties with the capabilities and infrastructure to operate a national mortgage modification program. I can point to experiences that we had in October and November of 2008 in making
that determination. You recall that one of the original programs
under the Act, was to purchase, directly purchase, troubled assets
off the books of financial institutions. One of the two programs we
contemplated at the time was to buy whole loans off the books of
the balance sheets of banks. We actually did an open competition,
soliciting any firm, any interested party that could help us implement that program.
I believe that over 70 firms applied for that role. Through the
analysis of those applications, it became clear to us that other than
the GSEs—which have connections to all the servicers across the
country, and which have the information technology capability to
manage information related to millions of loans at the loan level,
as well as the human capital to implement a national program—
it became clear to us and everyone who was part of that evaluation
process that if we were to implement a national mortgage program
that would involve all banks, all servicers, that really the GSEs
were the only ones with the infrastructure to do that.
So early on in the process during the transition and when the
new Administration was formulating its own financial stability
plan, a consensus was reached that the GSEs were the only ones
with the operating capability and the scale and scope of resources
to handle the HAMP program.
Mr. MCWATTERS. So even though they were failed business enterprises and they had failed at this business that you’re talking
about and other private sector participants had succeeded, it was
better to pick the ones that had failed, failed fairly dramatically by
the way, than to pick someone from the private sector?
I also note that the Government Accountability Office and
SIGTARP have issued reports—and I can read part of them, but
I’m not sure if it’s worth the time—that are fairly critical of Fannie
and Freddie. Are you familiar with those reports? Do you have a
response?
Mr. GRIPPO. I’m generally familiar with those reports. I would
offer the following thoughts. We had engaged an operating capability of the GSEs, their information technology, their ability to
deal with dozens, if not hundreds, of servicers in implementing
HAMP. We have not designated them as an agent or used those
parts of their business related to their credit risk management
standards, how they ran their own portfolio, or any other credit
risk decisions that they made in the subprime space.
So we were really leveraging an operating capability, which,
frankly, given the position of the GSEs in conservatorship and
given the public support they were and are under, we felt was actually a good use of those resources to help the Treasury provide stability to the markets and to leverage the entities in conservatorship
as best we could to help the mortgage markets.
Mr. MCWATTERS. So even though you’re saying that Fannie and
Freddie were ready to go, it’s my understanding they’ve had to hire
new employees, quite a number of new employees, train new employees, and the like. So I’m trying to connect that to the private

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sector industry, particularly in the financial services area, where
there’s a lot of excess capacity, people willing, ready, and able to
work, probably at a decent price. It’s difficult to understand why
that did not happen.
Mr. GRIPPO. Well, let’s take the case of Fannie Mae. We off the
bat leveraged literally hundreds of individuals in their IT operations, in their existing call centers, in their existing servicing operations, to implement the HAMP program. So while the enterprises have added personnel over time, the vast majority of people
working on key functions, certainly at Fannie Mae, were existing
employees of the enterprise.
Mr. MCWATTERS. Okay, thank you. My time is up.
Mr. SILVERS. Dr. Troske.
Dr. TROSKE. Thank you, Mr. Silvers.
Let me build on something you just said because I was sort of
struck by it, certainly in relation to the comments I made that
sometimes that contracting almost seems as if another form of a
bailout. I believe that you just said that, given that they were already in conservatorship, this was another way for Treasury to
simply provide them business and help stabilize the market and in
some sense prop them up.
So again, in light of—was that a goal for the program? If we have
someone in conservatorship already, we might as well give them
some business so that they don’t suffer any more serious financial
difficulties?
Mr. GRIPPO. No, that was not a consideration in engaging them
as financial agents. My comments went more to the fact that they
had an operating capability that we needed and could leverage for
our own policy purposes, and the decision to designate Fannie and
Freddie had nothing to do with the desire to prop them up more
than we already have.
Dr. TROSKE. Let me push a little, and maybe both of you, more
generally on decisions on contracting out and awarding contracts to
a single entity versus multiple entities. Certainly I do recognize the
distinction between decisions that were made in fall of 2008, when
the financial markets were—the financial system was under a
great deal of stress, shall we say, perhaps a crisis, and then decisions that were made later, maybe in the early part of 2009.
Do you think it’s important to hire only one firm to manage the
assets of TARP? You’ve mentioned the fact that Fannie and
Freddie seem to be the only firms that had the scope to adopt a
national program. Was there any thought to sort of having multiple
firms operating in multiple—different parts of the country? So in
some sense you can get information; one firm may be more successful than others and adopt different techniques. That’s another form
of competition that would allow you to get perhaps the best price.
So why only one firm to handle all our assets or to do loan—to
work with the servicers? Why not multiple firms?
Mr. GRIPPO. Well, in point of fact we have engaged multiple
firms for many functions. Let me give you two or three examples.
We originally hired three asset managers to manage the investments under the Capital Purchase Program, three relatively large
institutions. We did go back and hire an additional six asset managers to get more perspective and additional talent and expertise.

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So that was a case where, because of our need to hire asset management experience quickly, we hired a limited number, but we
went back and expanded the field.
We’ve done similar things with specific capital markets transactions. So for example, Morgan Stanley has been engaged to lead
the disposition of our sale of Citibank common stock, but they have
involved 23, I believe, additional firms, most of them small, as either co-managers or part of the selling group. That’s an instance
where we did engage one party. We needed a lead manager, but we
made it clear that we wanted a diversity of views and opinions and
additional providers.
So I think we have over time endeavored to engage as many providers as is reasonable to get a diversity of input.
Dr. TROSKE. So in terms of these contracts, and in particular the
HAMP program that Fannie is managing, how do you—what’s success? What are you looking for from them? How do you—what
metrics are you using to judge whether they’re successful?
Mr. GRIPPO. Speaking strictly in terms of vendor management
and not necessarily policy success of the program, there are two or
three things to note. We measure their performance qualitatively
against things like how are they helping us contain costs and what
is their sensitivity to costs, how responsive are they, what is our
business relationship like with them.
In addition to that, there are quantitative measures: How are
they processing transactions? How timely and accurate are their
reports? How many servicer reviews are conducted? So there’s a variety of qualitative and quantitative techniques we put in place to
manage their performance.
In addition to that, there are a variety of what I’ll call agreement
compliance tools we have, where they are required to report to us
on internal controls, on risk assessments, on their IT security, on
training of employees, on how they have revisited their conflicts of
interest mitigation plans.
So both in terms of performance management and agreement
compliance, there is a pretty robust regime of documents, standards, and continual reviews with the enterprises.
Dr. TROSKE. Thank you.
We’re going to do another round of questions. Let me turn to the
conflict of interest subject in somewhat more detail. Mr. Grippo, in
your initial remarks you talked about—actually, in response to my
initial question you talked about obtaining an objective third party
as a reason why you would seek out an outside financial agent. I’m
sort of puzzled by that and I want you to address the following
issue, and it’s sort of multi-dimensional.
In your written testimony, I believe you jointly alluded to the notion that there may be conflicts that can’t be managed. It strikes
me that there might be many circumstances in which there are no
objective private sector third parties, particularly given the types
of institutions and types of securities that TARP was dealing with.
What is—when is the government the objective third party?
Mr. GRIPPO. I think I can say that in making a final determination as to whether a conflict exists, or whether it is mitigated, the
government is the final party. Even though we ask all of our
agents and contractors to identify conflicts and come up with plans,

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ultimately we are the ones who are determining whether the conflicts have been mitigated.
I can say that we have not had a case, certainly not with any
financial agent, and I’m not aware of any instances with contractors, where we have gone ahead and engaged a third party where
there was an unmitigated conflict of interest. All actual and potential conflicts of interests must be directly addressed to our satisfaction before we move forward with engaging a party or doing work.
Mr. SILVERS. Now, some people, including the American Bar Association, have been critical of the process under the 2009 conflict
of interest rules that essentially provides for self-reporting. Now,
can you tell me when a—two things. One is, when a firm self-reports, what is your check on the accuracy of their self-reporting?
Then, two, as they self-report, what do you do with that data? Because I can imagine in the case of, say, Morgan Stanley or
Cadwalader that it’s essentially a continuous stream of self-reports.
Where does that information go and what is done with it?
Mr. GRIPPO. Let me first put self-reporting in context. We of
course issued a regulation on conflicts of interest. The regulated
parties in those instances were the providers. So that regulation
did not include the things we do ourselves, because obviously we
don’t need to issue a regulation to govern ourselves.
Nevertheless, independently we evaluate the conflicts posture of
all agents and contractors ourselves. So as the institutions are selfreporting, we ourselves, through a pretty extensive compliance office, are looking at the business lines of each vendor, their customers and partners, their affiliates.
Mr. SILVERS. Mr. Grippo, are you saying that basically the ABA
didn’t understand, that in fact you are doing your own independent
assessment of conflicts of your financial agents?
Mr. GRIPPO. We indeed independently review the conflicts posture of all the agents.
Mr. SILVERS. Then can you tell me how—again, what your management process is of the self-reporting that you get, particularly
with respect to what the Panel sort of assumes is a fair amount
of volume that you’re getting in reports from your various agents
and, in Mr. Backes’ realm, contractors?
Mr. GRIPPO. Yes. There is a continuous stream of self-certifications and reports on conflicts posture, at least quarterly in most
cases. Frankly, we have either monthly or quarterly management
reviews with certainly all of our agents, where we are asking those
firms to bring to us key management officials, attorneys, sometimes internal auditors, to explain any changes in their corporate
structure, their customers, their business lines, their key personnel, so that we can make a determination as to whether their
conflicts of interest mitigation plan needs to be updated.
Mr. SILVERS. Can I ask you specifically with respect to money
management firms and law firms, where the range of conflicts is
to my view greatest. What in your experience constitutes an
unmitigatable conflict?
Mr. GRIPPO. An unmitigated conflict——
Mr. SILVERS. Not unmitigated, but unmitigatable.
Mr. GRIPPO [continuing]. Would be, obviously, hiring a TARP recipient to manage TARP assets. And in fact, the conflict of interest

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mitigation regulation goes specifically to issues like that and in the
regulation itself declares these are unmitigated—these are conflicts
that cannot be mitigated and we will not permit these kinds of activities.
There are other examples, I believe, in the conflicts of interest
regulation like that.
Mr. SILVERS. My time has expired. Mr. McWatters.
Mr. MCWATTERS. Thank you.
Help me understand what unusual and compelling circumstances
justified the issuance of $85 million of contracts without going
through the usual competitive bidding process?
Mr. BACKES. The urgent and compelling authority that’s prescribed by the Federal regulations gives us the ability to streamline
the competitive process, not to ignore the competitive process. So
in the case of our early contracts, where we needed to bring on private sector expertise quickly to help support our response to the
crisis, we went through a process very similar to the formal competitive process. We conducted our market research. We developed
a statement of need, a statement of work, and put that out to the
firms that we were able to determine most likely to be qualified.
We used resources that were readily available. We used expertise
reaching within the Department and also at other agencies where
others might have had similar contracts. We used Federal databases of contracts to look for similar contracts elsewhere and then
reach out to make contacts very quickly.
The idea at the outset of the program, at the inception, was that
we needed to respond quickly, but we did it in a way that we were
going to do it, as I mentioned, right.
Mr. MCWATTERS. As the exigencies have dissipated, have you
opened these contracts up to competitive bidding or are they longterm contracts?
Mr. BACKES. No. One of the limitations on using that authority
is to meet the minimum needs of the government at the time. So
we entered into short-term contracts that in other circumstances
would be seen as debilitating, because we have to go through a procurement exercise in the near term. Our short-term response was
to get contracts in place to help us immediately. Mid- range, we expanded that out to bring in multiple firms.
I want to address a question earlier also. Our preferred method—
legal services is a good example—is not to have a single firm available under contract, but to have multiple firms. Therefore, we
would have a competitive environment going forward, not locked
into a single source for a particular thing, and also the ability to
mitigate conflicts. So if a particular firm had or a conflict arose
later on, we would have other firms that we would be able to draw
upon to meet the need.
Mr. MCWATTERS. Right. But if that is the case, why does one law
firm, Cadwalader, have a potential value of their contracts at $147
million? Why isn’t that split out among a dozen law firms, or at
least four or five other law firms? In fact, $250 million of potential
value procurement contracts are shared among Cadwalader, Simpson Thatcher, E&W, and PWC. I can understand the two accounting firms since we only have four left, unfortunately. But the law

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35
firms, there’s plenty of law firms and they’re happy to take your
business the last time I checked.
Mr. BACKES. Yes, and I do appreciate your concern deeply.
To finish the thought, the long-term strategy, which is now bearing fruit, is to have a full and open competition among all of the
law firms that are interested in doing business with the TARP. We
just recently awarded 13 contracts with a potential value of $99.5
million, I believe is the right number. That $99.5 million is not one
ceiling on one contract, but that’s the program value. So among
those 13 firms, they’ll compete for that potential value.
That’s also the case in the previous iterations, where we have
awarded multiple contracts for particular engagements. In the example of the bankruptcy program, we awarded contracts to three
firms who competed for a potential value of $26 million. One firm
has achieved significant dollars under the contract because of the
work they did and because of their success and their effectiveness
at representing us.
Mr. MCWATTERS. Okay. I’d like to—well, I’m not sure if I have
time to do this. Well, Professor Stanger—and I hope I’m pronouncing her name correctly—I want to read you guys something:
‘‘The business of government is increasingly in private hands and
there is a broad consensus that the current Federal contracting
system is antiquated, ill-equipped to deal with the surging demands placed upon it. It is not unfair to say that the TARP was
a bailout of the financial system, administered by the financial system, with all the potential conflicts of interest that inevitably arise
when the regulators are simultaneously the regulated.’’
Any comments on that?
Mr. GRIPPO. All programs established under TARP, every single
investment decision made under TARP, were made by employees
of the government. Not a single dollar has been allocated based
upon the discretion of a private party. We have made all the investment decisions under this statute.
Mr. MCWATTERS. My time is up. I’ll ask Professor Stanger to
elaborate also.
Thank you.
Mr. SILVERS. Thank you, Mr. McWatters.
Dr. Troske.
Dr. TROSKE. I’d like to continue with what Mr. McWatters was
pushing on. Give me your thoughts on the appropriateness of a regulatory body—and Treasury does have regulatory authority, as do
other entities in the Federal Government—while the Federal Government is also simultaneously contracting with firms that it regulates. That seems to me to present a large moral hazard problem
that it seems difficult to overcome.
I guess I’d like—you’ve done this for a while, much longer than
me. Give me your thoughts on that.
Mr. GRIPPO. There is a clear separation between the regulatory
authority in the Treasury, embodied in the OCC, the OTS, what
have you, and the policy and political authority in other areas of
the Department. We have taken great pains, and indeed the regulatory agencies would take great pains, to make sure that that separation in the law between those two parts of our business is never
breached.

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I’ll give you one example on how we have implemented contracting and procurement procedures to recognize a similar distinction. In the Treasury order that created the Office of Financial Stability, most of the authorities for implementing the Act were delegated to the Assistant Secretary for Financial Stability, which is a
political position. However, decisions related to the designation of
agents and entering into contracts were not delegated to the Assistant Secretary for Financial Stability.
In the case of financial agents, that’s actually delegated to a career official in the Treasury, who is not subject to any political
process. So the ultimate decision in designating any financial agent
is by a career government official and not by a political official.
Dr. TROSKE. So let me ask you a little bit about that. In particular, you’re contracting with banks, who are regulated by other
entities. Is there a process whereby if a bank does something or a
financial agent does something that violates some regulation that’s
set by a regulatory body—does that influence—would you get that
information? Would you use that information in judging whether
you wanted to continue to do business with this firm? Is that something that you take into account when thinking about their compliance, their regulatory requirements?
Mr. GRIPPO. Yes. One of the requirements for eligibility to be
designated a financial agent is that there are no material or debilitating regulatory findings or any findings that would present a
reputational risk to the Treasury. So as we evaluate what agents
to designate, that is an evaluation criteria. The agents must certify
to that over time and there are procedures in place that would
allow us, through appropriate information-sharing mechanisms, to
validate with the regulator whether a potential agent has that kind
of regulatory problem.
Dr. TROSKE. Something that—your answer to Mr. Silvers’ question I wanted to ask a little bit about, because obviously I’m not
understanding something, so I’d like you to help me. You said that
an unmitigatable instance, you would never give a TARP recipient
TARP assets to manage or TARP moneys. But wasn’t—both Morgan Stanley and Mellon did receive TARP money. So are they not
managing TARP assets, or help me understand this?
Mr. GRIPPO. Sure. Morgan Stanley was designated as a financial
agent, but well after they had repaid their TARP investment and
no longer had any obligation to us as a counterparty.
In the case of Bank of New York Mellon, they were obviously
hired as our custodian. However, they were not hired to manage
assets or to actually conduct transactions. Asset managers, other
broker-dealers, the Treasury itself, would conduct transactions and
give specific instructions to Bank of New York Mellon as to what
assets to take hold of, what payments to make. So that’s a case
where Bank of New York Mellon clearly could fulfill that responsibility without having a conflict over those assets.
Dr. TROSKE. I think my time is up.
Mr. SILVERS. The Panel thanks both of you and the Department
for your testimony, and if we could then have the second panel
come forward, please.
[Pause.]

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We are pleased to welcome our second panel, a group of contractors and financial agents providing services to Treasury in relationship to the TARP. Our witnesses are: Joyce Cianci, Senior Vice
President, Making Home Affordable, from Fannie Mae; Paul
Heran, Program Executive, Making Home Affordable—Compliance,
from Freddie Mac; and Mark Musi, Chief Compliance Officer and
Ethics Officer from the Bank of New York Mellon.
As with the prior panel, statements are limited—please limit
your statements to 5 minutes each. Ms. Cianci, you may begin.

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STATEMENT OF JOY CIANCI, SENIOR VICE PRESIDENT,
MAKING HOME AFFORDABLE, FANNIE MAE

Ms. CIANCI. Good morning. My name is Joy Cianci and I am Senior Vice President for the Making Home Affordable Program at
Fannie Mae. In this role I help to lead Fannie Mae’s efforts as the
Program Administrator in support of Treasury’s Making Home Affordable Program. I appreciate this opportunity to discuss Fannie
Mae’s role as Program Administrator.
Our role in supporting Treasury’s efforts to carry out the MHA
Program is a top priority for Fannie Mae. We have moved expeditiously to carry out our responsibilities under the Program, both to
help significant numbers of homeowners and to ensure careful
stewardship of the public resources committed to this effort.
I will briefly summarize the statement we have provided for the
record.
As Program Administrator, Fannie Mae established a dedicated
Program Management Office. We assigned dedicated groups to
carry out servicer integration, back office support, technology development, financial management, and policy advice. We also are
making use of the Company’s resources, corporate procurement,
and compliance and ethics functions, all on a nondedicated basis.
Let me offer five key examples of our work to implement the Program. First, one of our main duties is to support Treasury’s efforts
to prepare and distribute the guidelines, policies, forms, tools, and
training for the Program. To date we have helped Treasury issue
20 Supplemental Directives to loan servicers. We collaborated with
an inter-agency team to build and enhance the Net Present Value
Tool used to determine loan eligibility, and we have conducted 124
training sessions or events with key industry participants.
Another key duty is to get loan servicers involved in the MHA
Program. We have signed up over 110 servicers that cover about
90 percent of potentially eligible loans in America. We established
the HAMP Solution Center to execute those agreements, answer
general inquiries about Program guidelines, and resolve borrower
cases escalated by third parties. We also maintain a website that
provides Program guidelines and secure access to tools servicers
need to complete the loan modification process.
A third key duty is borrower outreach. Together with Treasury,
we set up a borrower information website, which has received over
92 million page views. We also established a borrower call center
through the Homeowners HOPE Hotline. The call center has received more than 1.4 million calls since June 2009 and has translation services available in over 150 languages.

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We launched a ground campaign with borrower outreach events
in markets hard-hit by the foreclosure crisis, where homeowners
can meet with servicers and HUD-approved housing counselors. So
far we have held 44 events that have attracted a total of nearly
45,000 homeowners. We also created a public service advertising
campaign in English and Spanish, in partnership with the Ad
Council.
A fourth key duty is serving as facilitator to the servicer paying
agent, Bank of New York Mellon. We calculate the incentive payments to be paid by the agent to servicers, borrowers, and/or investors as appropriate, and to date we have facilitated the payment
of $770 million in these incentives, including both GSE and nonGSE payments.
A fifth key duty is serving as record-keeper for executed loan
modifications and other Program activities. We developed and
launched a dedicated systems platform known as IR2 and we continue to enhance the platform. According to the MITRE Corporation, an independent consulting and research firm engaged by
Treasury, we were able to create the IR2 system of records substantially faster, more efficiently, and at a substantially lower cost
than comparable systems in the industry.
Now let me touch on two specific relevant topics. With respect to
compensation, Treasury pays Fannie Mae for its work according to
an agreed-upon budget. The budget is set at cost with no markup
for profit. Treasury can withhold payment if we fail to meet established deliverables and milestones, which it has not done to date.
Fannie Mae has not received any incentives from the Program.
Finally, in carrying out the Program Fannie Mae strictly enforces
its obligation to comply with Treasury’s conflict of interest regulations in all required areas. We have established firewalls that restrict the flow of information between Program personnel and other
personnel not working on the Program. We restrict access to systems containing Program-related information. We also require employees involved in the Program to sign nondisclosure agreements
and we require training, monitoring, and auditing related to our
conflict of interest obligations.
In closing, we take our role as Treasury’s Program Administrator
very seriously. We have a lot more work to do. We are committed
to our role in supporting Treasury’s efforts to make the Program
work for struggling homeowners.
Thank you.
[The prepared statement of Ms. Cianci follows:]

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46
Mr. SILVERS. Thank you, Ms. Cianci.
Mr. Heran.

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STATEMENT OF PAUL HERAN, PROGRAM EXECUTIVE, MAKING
HOME AFFORDABLE—COMPLIANCE, FREDDIE MAC

Mr. HERAN. Thank you, Mr. Silvers. Members of the Congressional Oversight Panel, thank you for inviting me to speak today.
I am Paul Heran, Program Executive of Making Home Affordable—
Compliance. We refer to ourselves as ‘‘MHA–C.’’ I lead MHA–C in
its examination, compliance, and consulting roles as a financial
agent of the U.S. Treasury. I report to Freddie Mac’s chief compliance officer. Before joining Freddie Mac, I spent 34 years at Ernst
& Young auditing financial services companies. I closed my career
at E&Y as the directing partner of their bank audit practice.
MHA–C is responsible for evaluating compliance for non-GSE
loans only. Our responsibilities include evaluating and reporting on
servicers’ compliance with HAMP. We evaluate compliance and we
assess the effectiveness of servicers’ internal controls assuring that
compliance. We also consult with Treasury on observations to improve the program.
To fulfill our compliance role, MHA–C created a new organization in a short period of time. I have established—we have established a comprehensive examination program, a strong partnership
with Treasury, and an effective working relationship with
servicers. We are providing reports for Treasury and providing effective feedback for servicers. At the same time, we continue to
strengthen our own organization and are continuously improving
our processes, our procedures, and controls. We are fulfilling our
role and responsibilities as the compliance agent for Treasury.
We believe our work with Treasury on key initiatives has significantly improved the effectiveness of HAMP. These key initiatives
have included:
Evaluating servicers’ use of the NPV model. This model provides
a key component of determining borrower eligibility for the program.
Developing and executing what we call the Second Look program
to determine that borrowers are properly solicited and evaluated
for the program.
Last, we evaluate incentive payments paid to servicers from
TARP funds. That is protecting taxpayer dollars.
Treasury actively manages MHA–C. Senior Treasury officials direct and closely monitor our activities. Three Treasury employees
are on site full-time at MHA–C offices. All of our principal activities, including protocols for conducting examinations and reporting
our observations, are performed under guidelines established by
Treasury. I and my senior management team report to Treasury’s
MHA compliance committee weekly. The committee is staffed by
senior Treasury officials leading the MHA program and is chaired
by a Treasury official with overall responsibility for compliance. At
these meetings we discuss the status of our compliance program,
observations from our examinations, and any ongoing challenges.
MHA–C’s examination program includes: testing servicers’ internal controls to verify that eligible borrowers are solicited and considered for the program; reviewing servicers’ use of the NPV model;

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examining loan files; reviewing the computation and payment of
TARP incentive funds to servicers, investors, and borrowers.
In consultation with Treasury, we select servicers to audit, loans
to review, and areas of examination focus. We select servicers to
audit on a frequency schedule based on size and risk. We routinely
conduct additional short-notice reviews to respond to adverse observations or emerging risks.
At the conclusion of each audit we provide servicers with summaries of observations. These observations may include noncompliance with program guidelines, internal control weaknesses, and in
the case of loan file reviews, differences with servicers’ conclusions
on solicitation and eligibility.
Servicers are generally required to respond to our observations
within 30 days. However, depending on the severity of the observations or guidance from Treasury, we may require an accelerated response and corrective action. Also, based on severity of observations, we may conduct additional short-notice reviews.
Decisions to impose financial remedies on servicers are made by
Treasury’s compliance committee. Although we provide input into
the committee’s decisionmaking process, we do not participate in
deliberations concerning financial remedies. These decisions are
made exclusively by Treasury.
Finally, Freddie Mac has established an extensive program to address potential conflicts of interest. In short, Freddie Mac created
MHA–C as a separate business unit within the company, staffed by
employees dedicated to MHA–C activities only. My written statement provides a detailed summary of this program.
I am proud of the work that MHA–C has done. We have helped
improve servicer compliance and have helped homeowners access
this very important program.
Thank you again for this opportunity to discuss our role. I am
happy to answer any questions.
[The prepared statement of Mr. Heran follows:]

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55
Mr. SILVERS. Thank you, Mr. Heran, for your testimony.
Mr. Musi.

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STATEMENT OF MARK MUSI, CHIEF COMPLIANCE AND ETHICS
OFFICER, BANK OF NEW YORK MELLON

Mr. MUSI. Thank you. Mr. Silvers and members of the Panel:
Thank you for the opportunity to appear before you today. My
name is Mark Musi and I am the Chief Ethics and Compliance Officer, BNY Mellon.
You have requested that BNY Mellon testify concerning its role
as a financial agent of Treasury in connection with Treasury’s administration of the Troubled Asset Relief Program. In particular,
we understand the Panel would like us to address compliance policies, procedures, and practices with respect to conflicts of interest
and confidentiality stemming from BNY Mellon’s role as financial
agent for Treasury under TARP. Since our appointment, BNY Mellon has been highly sensitive to the demands of our role and the
corresponding importance of having robust policies, practices, and
procedures in place to address conflicts of interest and confidentiality concerns.
A comprehensive statement of our policies, procedures, controls,
and mitigation plan is incorporated in the financial agency agreement that governs our responsibilities. That agreement sets forth
many of the stringent policies, procedures, and mitigation controls
we have in place with regard to conflicts of interest and confidentiality issues. Furthermore, on a regular basis our TARP compliance personnel interact with Treasury’s TARP compliance oversight
personnel to ensure that we are meeting Treasury’s expectations
with respect to conflicts of interest and confidentiality concerns and
monitoring.
I’d like to quickly summarize some of the more significant processes that we have in place to minimize any concerns about conflicts of interest and confidentiality. We have an information barrier policy. Under this policy, TARP-specific material nonpublic information may only be shared with those who need to know the information to perform their duties under the FAA.
We also have a TARP-specific restricted securities list. An
issuer’s securities are added to this confidential list to facilitate
BNY Mellon’s surveillance efforts, which help ensure that the information barrier is maintained.
With respect to controls, we implemented enhanced access restrictions to TARP-related electronic and paper files, which segregate and protect the confidentiality of TARP information.
As an added layer of protection, individuals servicing TARP are
physically separated from asset management personnel and use
separate information technology systems. Also, all BNY Mellon employees and subcontractors are required to execute a nondisclosure
agreement prior to accessing any TARP information, and to reinforce these processes, employees servicing TARP receive training
specifically tailored to their obligations under the FAA, and this is
in addition to other specific compliance-related training that these
employees would receive.
Regarding personal conflicts of interest, BNY Mellon applied its
existing policies, which provide mitigation controls, including a

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comprehensive code of conduct, a personal securities trading policy,
and other personal trading restrictions. In addition, BNY Mellon
maintains and enforces corporate-wide policies and procedures that
address relevant conflicts of interest mitigation controls, such as
compliance training, incident reporting, and limitations on communications with employees of Treasury.
Finally, since the inception of the program in October of 2008,
both our business and compliance personnel have had routine ongoing discussions with Treasury concerning BNY Mellon’s performance under the FAA.
In conclusion, our TARP compliance program is comprehensive
and robust and is working as planned. We have a professional and
productive working relationship with our client, the U.S. Treasury,
and its compliance professionals.
Thank you for giving BNY Mellon the opportunity to appear before you today. I look forward to answering your questions.
[The prepared statement of Mr. Musi follows:]

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Mr. SILVERS. Thank you, Mr. Musi. It is unprecedented in my experience that a witness finish ahead of schedule.
Mr. MUSI. You’re welcome.
Mr. SILVERS. And I can’t recall any time that any of us did, either. [Laughter.]
Let me say how much the Panel appreciates all of your testimony. At the risk of embarrassing Mr. Musi further, I particularly
found that your testimony addressed what we wanted very thoroughly, and I appreciate that.
We will have two rounds of questions today, as with the prior
panel.
First I just want to get something straight. Mr. Heran, you said
that your program does compliance and oversight for non-GSE
mortgages. Who does it for GSE mortgages?
Mr. HERAN. GSE mortgages is handled by the GSEs themselves,
under the supervision of FHFA.
Mr. SILVERS. So that means that for mortgages that are held and
securitized by Freddie Mac, that’s another department within
Freddie Mac, not your department?
Mr. HERAN. That would be another department within Freddie
Mac, that’s correct.
Mr. SILVERS. All right. This may not be your—this may not be
your bailiwick, so to speak, but how can you explain—how can you
explain that it’s not okay for you to do that with Freddie Mac mortgages and yet someone else within Freddie Mac, it’s okay for them
to?
Mr. HERAN. You’re right, Mr. Silvers, it’s not my bailiwick. I’m
not sure how the decisions were made. I know that I was brought
in to focus on compliance on non-GSE and that’s what I’m doing.
Mr. SILVERS. Okay. I’m sure we can pursue that with the appropriate people.
Mr. Heran and Ms. Cianci, can you tell me what you understand
your mission, so to speak, to be in the eyes of your, A, your superiors within your firms; and then, B, from the Treasury Department?
And is there any difference between the two?
Mr. HERAN. Well, I’ll start. I don’t believe that there is a difference between the two. I think that management at Freddie Mac
wants us to comply with the FAA and all agreements with Treasury. Treasury has the same objective. I can tell you that I view the
main responsibility as making sure that every borrower that deserves to be a part of this program gets an opportunity to be a part
of this program.
Mr. SILVERS. Ms. Cianci.
Ms. CIANCI. I will also add, this is clearly a top priority for
Fannie Mae. We are here to provide high quality service under obligations under the FAA as well and to support Treasury’s efforts
to make the Program as successful as possible for struggling homeowners.
Mr. SILVERS. How do you measure that?
Ms. CIANCI. We work very closely with Treasury. We provide
them with a variety of data regarding our performance under our
obligations on a monthly basis. They have a process by which we
invoice them and they have the option to pay us or withhold some
or all of that payment if they feel that we’re not meeting our obli-

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gations as they’ve been set out. To date, they have never withheld
that. So we——
Mr. SILVERS. I’m asking you a different—and I’m asking both of
you this question.
Ms. CIANCI. Okay.
Mr. SILVERS. How is this measured? You’ve described general
goals and Treasury hasn’t fired either of your firms. But how is
your performance measured? What are the metrics that are used,
either by your senior management within your firm or by Treasury? And what constitutes good?
Ms. CIANCI. I’ll continue with the thought that, with respect to
Treasury and our performance, I feel there is a constant feedback
loop to our expectations and how we’re performing against those.
There are also numerous third parties that are engaged to review
our work. For example, the MITRE Corporation, as I noted in my
opening statement, reviewed our work in the IR2 space for 2009.
They’re presently reviewing our IR2 work for 2010 fiscal year, as
well as the homeowner hotline oversight that we provide, our back
office operations, our CFO team, our Program Management Office.
They’re looking for efficiencies in the deliverables and the cost efficiency as well.
Mr. SILVERS. Mr. Heran.
Mr. HERAN. From our standpoint, Treasury is actively involved
in measurement at what I will call the lowest common denominator
to measure our performance. We touch servicers in a number of
ways. We have many different initiatives that, quote, ‘‘audit’’ the
servicers. We are measured against meeting the objectives and the
number of visits each of these different groups do within the organization. We’re managed very closely on that, on virtually a weekly
basis.
Mr. SILVERS. My time has expired. I assure you, Mr. Musi, I will
come back to you in the next round.
Mr. McWatters.
Mr. MCWATTERS. Thank you.
You know, I cannot pick up the paper or go to the Internet on
a daily basis and I do not find an article about a homeowner who’s
disgruntled by the entire process of dealing with Fannie and
Freddie, HAMP, doing a mortgage modification or a refinancing
under another program. They often say that: I was asked for certain papers, I submitted the papers, the papers were lost; I was
then asked for different papers. They’re getting a run-around.
You know, if you read this once or twice you think, well, this is
some reporter on sort of a slow news day. But when you read it
on a daily basis, it tells you if there’s smoke there’s probably some
fire.
So I’d like your comment on that, and specifically what you can
say to the homeowners, who may actually listen to some of this,
what you’re doing about that to streamline the program, to ask for
what you need the first time, to actually receive it, and then make
decisions?
Mr. HERAN. I’ll take the first stab at that, Mr. McWatters. I
share your concern and I deeply sympathize with every borrower
that is experiencing those kinds of difficulties with servicers. I in
fact am more bothered with it, I believe, than most people would

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be, because I’ve got to do two things. I’ve got to, one, sympathize;
and then, second, try to figure out what can I do differently to help
that borrower.
I assure you that every time one of those stories comes out we
do go back, reevaluate our processes to try and figure out what can
we do differently, what can we do faster. We’re continuously striving to improve it.
I can tell you that we do review the servicers for that exact issue,
documentation and control. We have cited many servicers for that.
We track their performance in implementing improvements to that
and I think many of them get better as a result of our procedures.
It’s a continuing issue. It’s been cited in the public report as a continuing issue and we will continue to try to drive enforcement.
Mr. MCWATTERS. Have there been any repercussions to you, I
mean, how you’ve been paid? Have you been penalized by Treasury? I mean, if the private sector did this and they were performing in these ways there would be a contractual clause which
basically said, after you read through eight or ten pages, you don’t
get paid or you get paid a lot less.
Mr. HERAN. I can understand the question. Nothing has come up
about paying us for that. Again, our job is to identify the issues,
to move the servicers toward compliance with the issues. We can’t
solve it in and of ourself.
Mr. MCWATTERS. If you can’t, who can?
Mr. HERAN. It has to be solved through a combination of ourselves finding it, of Treasury driving enforcement, and of Fannie
with its training procedures. It is a network of things that have to
take place across many different institutions to make it work better
within the servicers.
It’s the servicers themselves. The servicers I believe are trying
to fix these things. Some of them have more difficulty than others.
But it’s a comprehensive solution.
Mr. MCWATTERS. Mr. Heran, I’ll stay with you a moment. You
were an audit partner for 34 years, an entire career, at a large
firm. Have Fannie and Freddie, this function, been audited?
Mr. HERAN. Has our function been audited?
Mr. MCWATTERS. Yes.
Mr. HERAN. Our function is under continuous review by Treasury. I would say Treasury actively manages our function. We report to senior officials at Treasury on a weekly basis. Treasury has
three individuals that are full-time on site on our premises. Treasury reviews everything that we do, approves every report before it
goes out.
Mr. MCWATTERS. If you were hired as a consultant for E&Y to
come in to assess that assessment of Fannie and Freddie, would
you be satisfied? Would you sign off on that audit?
Mr. HERAN. Would I? I’m sorry, I’m not sure I understand the
question.
Mr. MCWATTERS. Well, you said that Fannie and Freddie are
being in effect audited by Treasury. If you were a third party, if
you were still at E&Y and E&Y was hired and you came in to assess those, including the internal control procedures, the conflict
procedures and the like, would you be happy to the point that you
could sign off, or would there be any material misgivings?

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Mr. HERAN. No, and perhaps I misunderstood the first question.
I was trying to describe the level of supervision that we receive, as
opposed to an audit. Those procedures are not independent. But
the point I’m trying to make is Treasury is actively managing the
process, which I would think is different and in fact far more severe than whether they had a third party come in and audit the
process.
Mr. MCWATTERS. But there is not a third party?
Mr. HERAN. There is no third party that audits the process.
Mr. MCWATTERS. Okay.
Ms. CIANCI. If I could add. I know the light’s blinking, but there
have also been—Treasury has directed us to perform an outside
audit through the SAS–70 work to measure our controls. We received an unqualified opinion in that space from Grant Thornton
with respect to our Program Administrator role. SIGTARP has audited our compliance and ethics performance and, as I described
earlier, the MITRE Corporation is doing numerous reviews of our
work as Administrator.
Mr. MCWATTERS. Thank you. That’s very helpful.
Mr. SILVERS. Thank you, Mr. McWatters.
Dr. Troske, you have questions?
Dr. TROSKE. Thank you.
Let’s start with you, Ms. Cianci. I’m still trying to struggle a little with exactly what output you’re producing. I’m an economist, so
I like to see an exact definition of outputs, since I work best with
that. My understanding is you actually aren’t the ones modifying
the loans. That’s the servicers. You’re just trying to convince the
servicers to do so.
So could you give me a little better—what is it that you are providing, the output that you’re producing for the Federal Government?
Ms. CIANCI. It’s a very wide scope.
Dr. TROSKE. Okay.
Ms. CIANCI. Let me highlight a couple of notes from my written
testimony that gives a little more detail. We routinely provide advice to Treasury as it creates the policy behind the Program and
help them produce the Supplemental Directives for the industry.
We also are responsible for the registration of the servicers, with
over 110 servicers having signed participation agreements, through
our HAMP Solution Center.
We prepare the requisite forms and contracts to get them signed
up for the Program. We are responsible for implementing a borrower-outreach effort on behalf of Treasury. We are also responsible for implementing an overall marketing plan that targets atrisk borrowers to help them understand the options available and
where to go to get help. In connection with that, we helped produce
the borrower web site, multiple materials in various languages,
and we lead an outreach campaign to troubled borrowers around
the country.
We also helped Treasury support a public service advertising
campaign targeting troubled borrowers.
Dr. TROSKE. Great. Okay, thank you.
I was struck by something in your written testimony and your
spoken testimony as well. You basically say that Fannie is doing

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this task at no profit and at cost. It’s my understanding you’re still
a for-profit private sector firm formally. So I guess, why are you
doing something that is not providing any profit for your shareholders or whomever? Why would you take on a task that, as a
business, that you’re doing at essentially—for no profit? Why would
you do that?
Ms. CIANCI. When the FAA agreement was entered into, that
was our agreement, to be basically made whole for the cost to administer the Program for the public mission.
Dr. TROSKE. Okay. So again—maybe Mr. Musi could tell me. I’m
assuming that BNY Mellon is earning a profit when they’re performing this work. Is that a fair statement?
Mr. MUSI. We do earn a small profit on this work.
Dr. TROSKE. I would have thought that was fairly standard. If
you are actually a private sector firm, a for-profit firm, don’t you
traditionally need to earn a profit for any actions that you take?
Is this just sort of you’re volunteering or this is out of a public service sense?
Ms. CIANCI. We indeed are being made whole for our costs associated with the Program. In order to help the Treasury stand up this
Program with the urgencies for struggling borrowers, that was the
arrangement we entered into.
Dr. TROSKE. Mr. Heran, does Freddie Mac—are you compensated
in the same way as Fannie Mae? Is it for cost and no profit for the
firm? Do you know?
Mr. HERAN. I do know and that is correct.
Dr. TROSKE. So you too are working essentially and earning no
profit for your shareholders for the work that you’re doing?
Mr. HERAN. That would be correct.
Dr. TROSKE. I must admit, as an economist I’m sort of shocked
by this, or surprised by that, and struggle to understand.
You indicated, Ms. Cianci, that you’ve received no incentives. So
there’s nothing in the contract as written that would reward you
for doing well, for doing an extraordinary job, for doing the job particularly well, other than the thanks of Treasury? I mean, I’m assuming they’d thank you for it.
Ms. CIANCI. There was a provision in the original contract that
provided the potential for incentive compensation. We have not received incentive compensation to date and we’re in the process of
revising our contract with Treasury.
My understanding is the revised contract will contain no framework for incentive compensation.
Dr. TROSKE. Okay. What was the provision? What goals were you
going to try to achieve that would then provide you some incentives? What were you being incented to do?
Ms. CIANCI. We had not addressed that with any specific detail
until now. We are in discussions regarding it.
Dr. TROSKE. I believe my time is up.
Mr. SILVERS. We’ll now have a second round of questions.
Mr. Musi, can you tell me, in dealing with—in managing the
structure of conflict identification and prevention that you described, what is—what are the most serious challenges you face?
And secondly, my understanding is that BNY Mellon, A, is a custodian for the TARP and thus has in certain respects less access to

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information than, say, a money manager or a law firm might. Can
you talk about what you might see as the challenges facing your
counterparts in those types of—for those types of contractors and
agents for TARP?
Mr. MUSI. When you have access to material nonpublic information—and let me describe that. That is information that, if known
to somebody in the public, would allow them to benefit through an
investment because it could affect the company that they are choosing to invest in and could be market-moving in terms of their stock
price.
We, in our role as custodian and our servicing of the TARP contract, really only have material nonpublic information for a very
short period of time, and that’s when a company requests to participate in TARP, and from that point forward, when we are notified by Treasury of that, to the point where the funds are actually
disbursed. It’s usually approximately a 2-week period, and that’s
where we apply all the controls that I described previously.
The challenge for most companies in dealing with this is how to
physically separate employees who would have access to the material nonpublic information associated with TARP and their actions
in other parts of the company, primarily to manage assets for
themselves or for their clients and, similarly, to make sure that
their employees don’t benefit from that material nonpublic information and trade on it.
Mr. SILVERS. Do you—what do you—you’ve been very thorough
in outlining what you do up front. What do you do on the back end,
so to speak, to monitor trading accounts, to monitor customer trading accounts, to ensure that this is not actually happening despite
your best efforts?
Mr. MUSI. We have 200 employees who have been identified as
servicing the financial agent agreement, and those 200 employees
each are required to have their accounts at an approved brokerdealer, who provides us with feeds of any trades that they enact.
Prior to trying to trade, they have to go to our centralized ethics
office, which maintains a list of any financial association who is
part of the TARP program, and if that name is on the list those
employees are prohibited from trading.
If, for example, they did trade anyway, at a broker-dealer that
wasn’t part of our approved network and who doesn’t provide us
with on-line feeds of trades and trade confirmations, then it would
obviously be up to the SEC to try and identify that. We actually
get representations from all of those employees annually that they
meet our code of conduct, which prohibits them from trading on inside information or sharing confidential information.
Mr. SILVERS. Do you have any process for liaisoning with the
NASD and the SEC in terms of this type of back end monitoring?
Mr. MUSI. If in fact they were concerned about one of our employees for any reason, including being part of the TARP program
and trading on that information, they would contact us and let us
know that they were investigating them.
Mr. SILVERS. But you don’t have a proactive sort of relationship
with them around this sort of thing?

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Mr. MUSI. We interact with the NASD and the SEC almost daily.
But in regards to this, only if there was a particular concern about
an individual.
Mr. SILVERS. Thank you.
Mr. Heran and Ms. Cianci, today’s Washington Post has a rather
extensive and quite disturbing account of efforts to foreclose on
homeowners, on American families, based on what appears to be,
some people characterize it as fraudulent representations, fraudulent documentation, and the like. This has been the subject of hearings across the way here in the House.
This would seem to raise a number of very serious issues about—
in relation to HAMP, particularly the possibility that government
money was being paid to mitigate in situations where there was
perhaps no basis for doing so, and also the possibility that in various respects recipients of HAMP funds—servicers, lenders—were
foreclosing on families when they had no right to do so.
This would appear to have something to do with your job. Can
you tell us what you’re doing in response to this?
Mr. HERAN. I’ll start. Actually, this ties into Mr. McWatters’
question about documents, and I’d like to at the same time clarify
my response on that. The allegations have not been that Freddie
Mac or Fannie Mae are losing documents. When I was referencing
that we take these very seriously and we reevaluate our own procedures, it’s our evaluation procedures of the servicers. These allegations have been that the servicers have been losing documents.
To the allegations in the Washington Post, this is another example. We take these extremely serious. We are clearly sympathetic
to the borrowers. We will reevaluate what we do.
On the surface, on the surface, while it’s of great concern because
it would be an indication of breakdowns in internal controls and
processes in general, I think it is important to keep in mind that
the foreclosure decisioning is a different decisioning than the
HAMP decisioning. HAMP decisioning actually takes place before
a foreclosure is allowed to go forward.
Mr. SILVERS. Yes. But against that—and my time is up, but I
cannot resist and hope my panelists will indulge me. Against the
shadow of foreclosure, does it not? I mean, isn’t what HAMP is
doing essentially assisting people who are facing foreclosure?
Mr. HERAN. Absolutely, and HAMP and the servicers’ compliance
with the rules of HAMP requires a solicitation and an eligibility
consideration for those borrowers. The point I’m making, if those
procedures are being done correctly, those would precede—there
are many, many other conditions of foreclosure, legal and otherwise, that have to take place then between the time that a borrower would not be qualified for HAMP and the time that a foreclosure takes place.
Mr. SILVERS. My time is far over. Mr. McWatters.
Mr. MCWATTERS. Thank you.
Mr. Heran, I understand that you’re a conduit, that you supervise what servicers do. But if the servicers are recidivists and they
have a history of losing documents and asking for documents again,
and once that is communicated to you, it seems incumbent upon
you to figure out a way to stop them from doing that, which was
my only point. Does that make sense?

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Mr. HERAN. Yes, sir. And we do. We reevaluate processes, we reevaluate what they are doing. Some of them come under much closer monitoring. And again, everything that we do, everything that
we see, is reported to Treasury.
Mr. MCWATTERS. Can we then expect to see fewer of those reports of mom and pop standing in front of their house, which is
being foreclosed even though, they say—and again, I don’t know if
they’re telling the truth or not, but they say—that all the documents were submitted and they did everything they needed to do,
but changes were made and they’re being foreclosed?
Mr. HERAN. I assure you that I’m doing everything in my power
and my group, in enforcing compliance, is doing everything in their
power to make sure those complaints are minimized.
Mr. MCWATTERS. I think a lot of the American public would very
much appreciate that, maybe more than most things these days.
Ms. Cianci, last month a group of outside analysts discovered
that some of the data on redefaults published by Fannie was inaccurate. What has been done to fix that? Was that just a one-off
deal? Is that indicative of something more systemic?
Ms. CIANCI. We believe it’s absolutely contained to this table that
was produced. We’re very clearly disappointed in the error we
made in the redefault table that was published with the June public report by Treasury, which overshadowed the good performance
of the permanent modifications in this Program.
But immediately upon discovering it, we notified Treasury and
we took upon a three-phased remediation approach. The first phase
was about recoding and validating a revised grid. Treasury engaged the MITRE Corporation to come in and independently code
and validate the grid. Fannie Mae assigned four independent
teams to recode and revalidate the grid and the Fannie Mae internal audit team, with the help of a third party consultant, similarly
oversaw the work.
MITRE expressed strong confidence to Treasury regarding the
revised table, and so at the end of phase one the revised table was
published on August 6.
In phase two, the internal audit and MITRE Corporation did a
root cause analysis and helped to identify some recommendations
that would bolster controls regarding our production of data in support of the public report.
We’re in phase three right now, which is to implement some of
those items to bolster our controls in this space.
Mr. MCWATTERS. So you are addressing it, then?
Ms. CIANCI. We are indeed.
Mr. MCWATTERS. Okay. About a year ago, on October 21, 2009,
there was a report by SIGTARP or SIGTARP noted the significant
difficulties that Freddie Mac was having meeting its obligations
and that Treasury had to develop a detailed remediation plan addressing many of Freddie’s contractual obligations, as well as a
place—as well as place a Treasury official with Freddie Mac fulltime.
What’s your response to this, Mr. Heran? I mean, is this problem
that SIGTARP identified—it’s 11 months old now—has it been basically solved?

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Mr. HERAN. Yes, it has been solved. I was part of the solution.
As you see in my resume, I have an extensive background in public
accounting and auditing financial institutions. I was brought in as
part of the solution. We have dramatically expanded our hiring of
audit expertise. Two of my five direct reports have been brought in
since I got there and they also have Big 4 public accounting experience. So we have addressed the problem and we are doing robust
auditing of these servicers today.
Mr. MCWATTERS. Assuming this job you have now will not last
forever, when you look back on it how will you define success? How
will you know whether or not what you’re doing today was successful? What’s your principal goal? If you had to write down on a piece
of paper, I am here and my goal is this, what would that be?
Mr. HERAN. My goal would be—actually, you addressed it in an
earlier question. My goal would be that I do not have borrowers
standing on the doorstep that are being evicted from their home
that there is any chance that would have qualified for this problem—for this program. There’s no question that the program can’t
address everyone. I measure my performance on making sure that
everyone that is eligible gets a chance for this program and those
that are not eligible do not get into the program.
Mr. MCWATTERS. One last question. Do you see a substantial uptick in the amount of permanent modifications over the next few
months?
Mr. HERAN. That really should be addressed to the program administrator.
Mr. MCWATTERS. Okay, fair enough.
My time is up.
Mr. SILVERS. Thank you, Mr. McWatters.
Dr. Troske, it’s your turn. Like myself and Mr. McWatters, you’re
entitled to a little bit of extra time.
Dr. TROSKE. We’ll see whether I take it.
Mr. Musi, as an economist I am somewhat fixated on prices, output, and contracts. I’m not going to ask you what you charge the
Federal Government because that’s inappropriate. But I do want to
know a little bit more about the structure of your contract and how
it compares to work that you would do for other entities that aren’t
public entities, so for private entities.
So I guess I’d start off by asking, how do you determine—how is
the price set in this contract? Is it given to you? Is it a negotiation
process? How does the price that you get paid compare to what
compensation you’d receive if you were working for a private entity?
Mr. MUSI. We worked very carefully with Treasury to establish
a price that we thought was fair to us and to them. At the inception of the program, we established a valuation-based pricing mechanism. So it’s our cost, plus what we believe and what they have
determined to be a reasonable markup. That markup was based on
what has been our average pricing for all of the services we provide
to all of our clients. So it was on that basis that we represented
it to Treasury, and Treasury derived comfort from that.
Dr. TROSKE. So you feel that this is—you wouldn’t be getting
paid more if you were doing this for someone else other than the
Federal Government?

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Mr. MUSI. We believe we’ve priced it fairly and that the services
are based on the types of services we render to other institutions
and the pricing that we would derive from that.
Dr. TROSKE. What output—what is Treasury looking at when
they evaluate your performance, what sort of financial—how do
they monitor your performance? What is it that they tell you
they’re looking for in terms of what you’re producing for them?
Mr. MUSI. We produce a very detailed accounting to reflect the
costs. So each person who is actually supporting the program—it’s
literally down to the time card level—would then reflect the
amount of time that they put into it, as well as other fixed costs
that we have that we know are only associated with the TARP program, and those are the costs that become the basis for the costplus calculation.
Dr. TROSKE. Again, what are those people that are working for
the program supposed to be producing? I mean, what output are
they producing? What is it that you’re producing for Treasury? A
return on assets, or bills paid promptly on time, or what is it that
you’re producing?
Mr. MUSI. Our role in this process is functionally a service provider. We basically make payments in accordance with instructions
and we take in assets, we custodize those assets, and we pay dividends. So it’s a very ministerial, administrative type of role. All of
what we’re talking about are the costs associated with that administration.
Dr. TROSKE. You seem to indicate that your contract has no sort
of financial incentives, that if you do this very well, you do this
very well, you get paid additionally. Is there any sort of incentive
in the contract that would push you to do certain actions?
Mr. MUSI. I don’t believe that the contract has those terms and
we are only pushed to serve the requirements that we are committed to serving in the contract, and certainly not to take any
shortcuts in the interest of shaving costs.
Dr. TROSKE. Mr. Heran, I want to come back to you about some
of the issues Mr. McWatters and Mr. Silvers have raised. When
you find a servicer that’s not in compliance, that is doing things
that you find disappointing, you’ve said you adjust the process and
try to improve and streamline the process so it works better. Do
they suffer any penalties? Is there a point at which they do suffer
penalties? And what would those penalties be?
Mr. HERAN. There are remedial actions. Every finding that we
have goes into a report, depending on the severity of the individual
observation or finding. It is followed up on. That follow-up can be,
for the less severe, routine, I think the servicers are given 30 days
to respond to our findings. We check the validity of those responses.
Where it’s more severe, for example in the documentation that
we’re talking about—or even a better example might be the early,
well publicized problems with the NPV model—there is immediate
remediation. The servicers—several servicers were directed to
cease using what’s referred to as their recoded model. That is simply taking the Treasury model and making it more efficient by coding it into the servicer’s own system. Many servicers were told, because of the handling of that recoded model, that they needed to

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return to the Treasury model until such time as their recoded
model could be remediated.
As to the question of remediation other than activities, as I said
in my opening statement, we are not part of the deliberations of
financial remedies, which I understand have been imposed from
time to time by Treasury, but we are not a part of that.
Dr. TROSKE. Mr. Musi, I’d like to return to you. I skipped a question, so I apologize. Tell me a little bit about the procedures that
you have in place to ensure that you’re monitoring your compliance
with FAA more generally and particularly your obligations to
Treasury? What are you doing internally to make sure you’re living
up to the contract?
Mr. MUSI. We have a comprehensive compliance monitoring program, where people within the compliance function check regularly
that we are meeting our requirements under the FAA. The employees involved produce attestations that they are following our code
of conduct. We have a SAS–70 that is produced annually by an external accounting firm, that covers all of our requirements under
the program. And we have quarterly representations and annual
representations to Treasury about our role and our services under
the agreement.
Dr. TROSKE. Thank you very much.
I’m done.
Mr. SILVERS. Thank you, Dr. Troske.
The Panel very much appreciates all of your testimony and your
willingness to appear before us. The second panel is now excused
and we will call the third panel. [Pause.]
So we will now move to our third panel, which consists of three
individuals with considerable expertise in the field of government
contracting. We are pleased to welcome: Professor Steven Schooner,
who is the Professor of Law and Co-Director of the Government
Procurement Law Program at the George Washington University
School of Law.
We are also pleased to welcome Professor Allison Stanger, Professor and Chair of the Political Science Department at Middlebury
College; and finally, Scott Amey, General Counsel for the Project
on Government Oversight.
So if the panelists have got their seats, as with the prior two
panels, witness statements are limited to 5 minutes per witness.
Professor Schooner, you may begin when ready.

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STATEMENT OF STEVEN SCHOONER, PROFESSOR OF LAW AND
CO-DIRECTOR OF THE GOVERNMENT PROCUREMENT LAW
PROGRAM,
THE
GEORGE
WASHINGTON
UNIVERSITY
SCHOOL OF LAW

Mr. SCHOONER. Distinguished Panel members: Thank you for inviting me to join you today. Based on discussions so far, I am disinclined to disregard and not waste your time with my written testimony, which, frankly, is in large part irrelevant based on the discussion so far. So what you’ll see in my written testimony is, probably the most relevant thing is footnote 2, which talks about some
of the macro-level concerns with the TARP contracts. We’ll know
over time whether you’ve bought the next Winstar or Spent Nuclear Fuel set of cases.

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74
But I do want to make just a single discrete point about the contracts before I move into some larger things. First, $445 million
sounds like a lot of money, but in the grand scheme of Federal procurement it’s the statistical equivalent of nothing. But objectively,
looking at what Treasury’s done so far, they have been more professional, transparent, and accountable than the Federal Government norm that we’ve witnessed over the last decade. I think that
that’s important to keep in mind.
A number of other things that we’ve talked about. I think, Mr.
Silvers, in your opening statement you suggested the high level of
frustration with outsourcing, and I think it’s just important to keep
in mind that this is not just Treasury; this is a government-wide
problem. Professor Stanger has written extensively. There’s a lot of
literature on how dramatic it is at places like NASA, in the intelligence community, at the Agency for International Development.
But I think that one of the things that’s really important is one
of the most compelling and logical reasons that the government,
like other organizations, outsources is for surge capacity, when
they just don’t have enough resources. Obviously, that’s what happened here.
More importantly—and I think this is really important—if we
look at the last 20 years of experience, government managers are
inclined to outsource, they turn to the private sector, because it is
hard, it is slow, to hire new people. The civil service regime is not
responsive. They don’t have meaningful incentives and disincentives to manage. And after the crisis you’re stuck with all of those
people.
I think what we’ve seen with the military reflects how dramatically the small government sentiment in this country has caused
us to have a government that’s too small to meet our needs.
There was also a question that arose earlier about the outsourcing of legal services and, frankly, I think that’s an eminently logical step. The private sector uniformly relies on these types of individuals as their fiduciary agencies and I think—I apologize if I
misheard, but I think it’s disingenuous to imply that the Federal
Government has legal resources available in reserve. They surely
don’t have them at the Justice Department, and I think that it was
perfectly reasonable to turn to the private sector there.
I want to turn very briefly to, I think it was Dr. Troske who
brought up the issue earlier about cost reimbursement contracts.
Frankly, it’s not in the least uncommon in Federal Government
contracts to have pure cost reimbursement contracts with no profit.
Many of the nation’s largest contractors are in fact not-for-profits.
But, as you know, many for-profit firms take cost reimbursement
contracts or even unprofitable work for a host of reasons. They
might do it to maintain their market share, they might do it to initiate, maintain, develop, their client relationships, basically achieving goodwill. They may do it to maintain their workforce in a lousy
economy, or they might do it to develop capacity, facilities, or experience.
But I think, going back to the main issues that I think I might
have been invited to talk about today, although I’m not even sure
at this point, looking ahead, I think that the single biggest challenge that the Treasury faces with regard to the procurement con-

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tracts is after contracts are awarded the government customer best
protects its interest when it staffs its contract management function with skilled professionals. The problem that we have in a situation where it’s all about people is over the last 20 years this is
a situation where the government hasn’t excelled, hasn’t been competent. Frankly, it’s been an unmitigated disaster. The government’s track record on post-award contract management has been
abysmal.
Therefore, if I was going to make a single relevant point today,
it’s that any prospective investment by the Federal Government
generally or the Treasury Department specifically in upgrading the
number, the skills, or the morale of their contract purchasing officials or their contract management officials would reap huge dividends for the government and the taxpayers. It’s not going to solve
the problem overnight, but it’s a responsible investment in the future.
Thank you for the opportunity to share these thoughts with you.
I just wanted to have you have one more witness who beat the time
deadline, and I’m pleased to answer any of your questions.
[The prepared statement of Professor Schooner follows:]

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86
Mr. SILVERS. Professor Schooner, I was going to comment that
this seems to be catching. Very dangerous for us Panel members,
who have to emulate it.
Mr. Amey, the floor is yours.

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STATEMENT OF HON. SCOTT AMEY, GENERAL COUNSEL,
PROJECT ON GOVERNMENT OVERSIGHT

Mr. AMEY. Thank you for inviting me to testify before the Congressional Oversight Panel. I’m the General Counsel of the Project
on Government Oversight, also known as ‘‘POGO.’’ POGO was
founded in 1981 by Pentagon whistleblowers who were concerned
about weapons that did not work and wasteful spending. POGO
has a keen interest in government contracting matters and I’m
pleased to share POGO’s thoughts about Federal contracting.
Despite many reforms to make contracting easier, the reality of
the situation is that contracting has become very complex. Contract
spending now accounts for more than $530 billion a year. Oversight
has decreased. The acquisition workforce has been stretched thin.
Contractors are now performing jobs that were once performed by
public servants, and spending on services now outpaces spending
on goods.
Dr. Troske’s questions to the last panel about metrics and about
outputs is very relevant because they’re very hard to measure in
comparison with when we are buying bullets, boats, ships, airplanes, and such. At times there’s been a policy in Federal contracting that switches to quantity rather than quality, especially
considering that the government is spending half a trillion dollars
on contracts, and now we are asking an already stretched-thin contracting staff to award hundreds of billions of dollars in contracts
and grants through the bailout and stimulus programs.
When we discuss Federal contracting there are two questions
that need to be asked and answered. The first is what are we buying, and the second is how are we buying it. Good contracting practices include valid market research, requirements definition, competition. Mr. McWatters was asking the first panel about length of
contracts and were they recompeted. They’re very vital, especially
when you’re using other than full and open competition contracting
vehicles.
Comprehensive negotiations, pre-award audits to verify cost and
pricing proposals, access to contractors’ cost and pricing data, ongoing oversight, transparency, avoiding risky contracting vehicles, as
well as questions about scope of work and is that work being performed. Additionally, consolidation in the contracting arena has
forced the government to consider revolving door restrictions and
personal and organizational conflicts of interest.
Subcontracting raises many questions as well due to the government’s lack of privity. Subcontracting plans are helpful. Access to
information about the quality and the scope of work are essential,
but often, with multiple layers of subcontractors, oversight is very
difficult. According to last month’s Congressional report, Treasury
has entered into about 108 transactions with contractors and others as of August 31, 2010. In so doing, Treasury has entered into
cost-reimbursable, fixed price, time and material, labor hour contracts to procure $450 million worth of services. In those efforts to

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stabilize the economy, Treasury is buying services from financial
institutions, law firms, accounting firms, consulting firms, to support its response to the nation’s economic crisis.
Treasury has issued guidance and promotes the use of competition and the utilization of small businesses. As Professor Schooner
said, I think Treasury is probably way above the normal standard
when it comes to government contracting as far as most Federal
agencies.
Additionally, it has issued TARP conflicts of interest regulations
to mitigate or eliminate ethical concerns. Despite those policies and
regulations, TARP has a little way to go before it’s operating in the
best interests of taxpayers. Many TARP contracts appear to be a
mixed bag when it comes to competition. Several contracts have
been awarded with less than full and open competition and Treasury has to make sure that full and open competition is the rule,
not the exception.
One arena that might require additional reforms is the implementation of the conflicts of interest policies. The one thing I’d like
to say about that is I think there are a few barriers that they didn’t
think about as far as assuring that information collected and retained from these entities is publicly available, transparent, to
overall keep the faith in the integrity in the overall TARP program.
Also, I would say that there needs to be additional provisions to
protect whistleblowers, establish hotlines so that allegations can be
brought forward as far as if a conflict of interest is real or apparent, and also harsh enforcement to those who violate the rules, and
therefore that would help fill some gaps.
Treasury has been open as far as its TARP policies, procedures,
and contracts. Like I said, most contracts aren’t posted online, so
it is refreshing that contracts are posted online. The only thing I
will say is, in going through some of the contracts I did notice that
some are GSA schedule contracts and their pricing data has been
redacted. Well, GSA schedule contracts have pricing that’s online
and is publicly available, so I’m not quite sure why those
redactions were made. But that may be a little overboard as far as
what they’re doing.
I would also like to applaud Treasury for converting risky types
of contracts, specifically time and materials contracts, into fixed
price contracts. But I would still have questions about when those
conversions are being made.
Thank you for inviting me to testify today. This hearing is vital
to ensuring that TARP is working in the best interests of the government and taxpayers, given the size and scope of the program
and the contracting support involved. POGO looks forward to working with the Panel to further explore how the government should
improve the contracting system to better protect taxpayers, and I
welcome any questions that you may have.
[The prepared statement of Mr. Amey follows:]

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98
Mr. SILVER. Thank you, Mr. Amey.
Professor Stanger.

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STATEMENT OF ALLISON STANGER, RUSSELL J. LONG ’60 PROFESSOR OF INTERNATIONAL POLITICS AND ECONOMICS
AND CHAIR OF THE POLITICAL SCIENCE DEPARTMENT,
MIDDLEBURY COLLEGE

Ms. STANGER. Well, I’d like to begin by thanking the Congressional Oversight Panel for the important work you’ve done to date.
The Troubled Asset Relief Program was in many ways a bipartisan miracle, a heroic and rare instance of Democrats and Republicans working together for the common good. In saving the financial system, the TARP served the interests of every American. Yet,
as this Panel has repeatedly pointed out, the manner in which the
TARP was executed and the optics associated with its wholly
opaque implementation have left an unfortunate legacy.
The economic experts who testified before this Panel all emphasized the moral hazard created whenever some firms are deemed
too big to fail. I’d like to argue here today for a broader understanding of the moral hazard that the implementation of the TARP
has illuminated: our acceptance of emergency or extrabudgetary
government contracting as standard operating procedure and our
failure to come to terms fully with the moral and political implications of that development.
We today fund long-term counterinsurgency operations through a
series of supplemental appropriations. We stabilize the financial
system by granting Treasury emergency contracting authority. We
revitalize the economy with an emergency stimulus package. These
measures may all have been necessary, but they have one feature
in common. Because they all involve extrabudgetary contracting,
they have the cumulative effect of rendering our governance and
our government spending patterns wholly opaque.
How did this come to pass? Much attention has been paid to the
role that big money plays in our politics, from the huge sums spent
on lobbying to the influence of campaign contributions. But there
is an additional pressure point for corporate influence. Government
is now in many ways wholly dependent on the private sector to go
about its daily business. Government’s increasing reliance on contractors has fed a vicious circle that over time has resulted in a
Federal Government that has been effectively hollowed out.
To cite one telling statistic, the Federal Government had the
same number of full-time employees in 1963 as it did in 2008. Yet
the size of the population has doubled and the Federal budget in
that same period of time, in real terms, has more than tripled.
Layer trillions of dollars of contracting for the wars in Afghanistan
and Iraq, the TARP, and the stimulus package on top of that general picture and you have the perfect storm.
The last decade was marked by an explosion in outsourcing the
work of government to the private sector. For example, in 2000 the
Department of Defense spent $133.2 billion on contractors. By 2008
that figure had grown to $391.9 billion, an almost threefold increase. If we look at the Department of Health and Human Services, in that same period of time their contract spending more than
tripled.

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So, viewed in this light, the problems of TARP spending that this
Panel has rightly identified are very much associated with government-wide problems. According to the GAO, the number of contractors that supported TARP administration operations grew from 11
at the start to 52 by October 2009, a 473 percent increase in 1
year’s time.
Since there can be no self-government when the work of government is largely hidden from public view, these trends demand serious attention. How can we ensure best practices in government
contracting? We can begin by insisting that the existing law be
upheld. The Federal Funding Accountability and Transparency Act
of 2006 (FFATA), co-sponsored by then-Senator Barack Obama,
stipulates that all information on how taxpayer money is spent is
to be provided on a, quote, ‘‘single searchable website accessible to
the public, at no cost to access.’’ USAspending.gov is supposed to
be that website. FFATA also mandated that information on subawards be available to the public by January 1, 2009. That information is still unavailable.
Without transparency in subcontracts, we are effectively pouring
taxpayer money into a black hole, and this applies to Iraq and Afghanistan, I think, as well as the TARP.
I stand ready to be persuaded otherwise, but to date I have found
most concerns about the costs of transparency to be misplaced, excessively focused on the short-term at the expense of the sustainable. Some say that transparency is too time-consuming and invites
endless dialogue with the public. Since the latter is precisely what
self-government requires, the former is not too high a cost to bear.
Others argue that full disclosure compromises business proprietary principles. But when business is serving government, other
principles must trump comparative advantage and profit.
In conclusion, when so much of the work of government is in private hands, standard approaches to transparency will no longer
suffice. Companies as well as government can operate with the
purest of intentions, but if their most important transactions are
opaque to the public they will lose trust and effectiveness. Emergency circumstances may make this more difficult, but no less imperative. The twin values of self-government and fiscal prudence
depend on it.
Thank you for your attention and I welcome your questions.
[The prepared statement of Professor Stanger follows:]

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Mr. SILVERS. Thank you to all of you for your testimony. As with
the prior two panels, we will do two rounds of questions.
Let me begin with this. Professor Schooner, in your testimony,
your oral testimony, you pointed out the fact that $400 billion
seems like a lot of money if we’re talking about each of our——
Mr. SCHOONER. I’m sorry, $400 million or $400 billion?
Mr. SILVERS. Million.
Mr. SCHOONER. Okay.
Mr. SILVERS. $400 million seems like a lot of money, but actually
isn’t in the scale of government contracting and certainly in relation to the scale of TARP, an observation that I wholly agree with
and I think has a number of implications. The concern that I have
and that I would like your thoughts on as a group is not about
whether or not some of that money is potentially being wasted, although I think that would be a serious matter. Any waste of the
public’s money is a serious matter. But rather, the leverage issue,
that when private contractors or fiscal agents are given control of
or an ability to influence the hundreds of billions of dollars that are
involved in the TARP program the consequences of that are very
or could be potentially very serious.
That seems to me to be the focal point of this hearing, whether
that involves the possibility, given the nest of conflicts involved in
any financial services or outside law firm, that decisions would be
made either in the interests of that firm or its other clients, who
obviously will have continuing and profitable dealings with that
firm over time, or the potential in, say, the HAMP program that
decisions will be made not in the interest of the public or in the
interest of HAMP beneficiaries, borrowers, but in the interests of
contractors or their clients.
So this Panel in dealing with this issue of contracting is sort of
handed a giant set of questions, issues, data. If those are our concerns, what should we be paying attention to?
Mr. SCHOONER. If you’ll indulge me with a two-part answer. The
first is you are spot-on when you say that the dollar value of contracts is entirely deceptive and for the most part irrelevant. What’s
really important is what is the outcome—and I think Scott said
this earlier and it’s in my written testimony—you’re looking for
with the contract, and the way that the government, like any customer, gets the outcome it wants is by planning—that means understanding what their needs are—drafting contracts that are intended to achieve those objectives, negotiating to ensure that the
contractor has bought into it, and then both incentivizing behavior
that you want and disincentivizing behavior that you don’t want.
If you look at the long parts of the testimony that you’ll see in
my testimony and Scott’s, we’re talking about a lot of the same
things, and there’s plenty of best practices out there on doing that.
To some extent, I think, as we suggested earlier, Treasury is ahead
of the curve. So I think that on that specific issue it is important
with a contract, just like being a manager, you can get whatever
you want, but you have to be clear what your needs are and then
you have to incentivize and disincentivize behavior getting there.
Mr. SILVERS. Let me press you on that. I think that seems like
a perfectly reasonable generic explanation of how to get—of good
contracting practices. But it’s not clear to me that you can get

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whatever you want in a contract where other interests of the contractor dominate the contract. That’s a unique—maybe not unique,
but a particular problem to TARP that I think we need help in
thinking about how to address.
Mr. SCHOONER. Correct. There are two parts to that. Number one
is choosing the contractor and then the other is incentivizing the
behavior you want and disincentivizing the behavior you don’t
want. If you believe that there are certain conflicts that you either
want mitigated or avoided, trust me, you can do that with the pricing mechanism. The question is what are you articulating is your
highest priority.
Oftentimes—and this is a large problem when the government
doesn’t have internal capacity—if the best personnel is out in the
private sector and you don’t control them, you can’t necessarily motivate them to do what you want them to do. So you have to make
a tradeoff.
So again, one of the things that we talk about in our testimony:
You can get complete accountability and you can get complete compliance, possibly at the expense of value for your money. So it’s all
going to be a tradeoff. But it comes back to the fundamental outsourcing issue, and I don’t want to revisit this too long, but, as Allison points out, I think we all agree, the government has become
increasingly dependent upon contractors, and I think it was you
who earlier raised the issue of inherently governmental functions.
The key thing here is this is not a procurement issue. It may be
that at the Cabinet level no one wants to talk about it and for the
purposes of analysis it gets shunted to the Office of Federal Procurement Policy in Office of Management and Budget because no
one else understands it. But these are absolute fundamental leadership issues that have to be confronted at the highest levels.
Mr. SILVERS. My time has run. I’m going to ask the other panelists to respond on the next go-round.
Mr. MCWATTERS. Thank you.
We’ve all read the testimony from the first two panels, listened
to it. I’ve read your testimony, and it seems to me I can boil this
down into four different things. One, I’m concerned about competition or the lack of competition. Two, I’m concerned about accountability. Three, I’m concerned about transparency. And four, I’m
concerned about conflict of interest.
As Professor Schooner said a moment ago, you can have perfect
accountability if you spend a lot of money having perfect accountability. So that’s really not what the goal is here.
So with these four benchmarks, I would like for each of you to
reflect to the extent you can and grade Treasury on how Treasury
has done on competition, accountability, transparency, conflict of
interest. If you don’t give an A, explain why. Start with you, Mr.
Amey.
Mr. AMEY. Okay. On competition, I would say that I’m openended right now, but I would probably say less than an A, if I may
hedge my bet with either an A or less than an A, due to the fact
that, although all these contracts—in the first panel you talked
about how many vehicles there were and how they had selected
multiple contractors, but the real question is what is the level of
competition after you have all these preapproved contractors on the

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list. Are you diving down to get better prices? Are you trying to
drive that competition and use that competition against each other
to leverage your buying power?
On accountability, again I would say that I am open-ended, but
I would say less than an A, due to the fact that obviously SIGTARP
is doing its job and also the GAO, but I think the last GAO report
was last fall as far as the status of TARP where they really took
a look at contracts. I don’t know if their mandate has expired, but
I would like to see some additional information and data from them
about the current level of contracts, with what is active, how much
money is still obligated or could be spent in the future.
As far as transparency, I would give them an A, absent the caveat I made before on some of the redactions on pricing data that
is already publicly available.
On conflicts of interest, I would say less than an A, because I
haven’t seen the final rule come out after comments were received
based on the 2009 conflicts of interest rule. So I think there are
some things that they could tweak there, and also add some transparency to that process to make sure that we can see the reports
that are coming in, because I do have some concerns with a program that is so heavily reliant upon the contractors or the agents
to report.
Mr. MCWATTERS. Thank you.
Professor Stanger.
Ms. STANGER. I think it’s a great question. You may not like my
answer, but I think I would throw out the idea of grading Treasury
on the TARP, for the simple reason that we were in emergency circumstances, and I think emergency circumstances excuse a lot of
things. However, we can also look at the TARP as kind of a window
on larger problems, and that’s what I tried to do with my testimony.
The point I would make with reference to all four of those concerns, which I think are extraordinarily important, is that transparency facilitates all of them, not just transparency for its own
sake. You can get better competition if you increase the information that is out there and make the process more transparent. You
obviously will have better accountability if when people act they
know that it’s going to be in the public domain. Transparency can
introduce self-policing behavior that I think is extraordinarily important in a complex economy. And with respect to conflicts of interest, we can’t even begin to evaluate conflicts of interest until we
can see what the interests are in a particular transaction. To me,
when I look at the TARP and try to understand what actually happened, I am in many ways mystified by what happened. I don’t
know. There’s a lot that’s inside a black box, and you really can’t
talk about mitigating conflicts of interest until you can see clearly
what the interests are. That’s why I come down on the side of radical transparency.
Mr. MCWATTERS. Fair enough.
Professor Schooner.
Mr. SCHOONER. I’ll try to be brief, but I’m going to give you three
standards. The first is on a global standard they’re A-plus across
the board. There is no state on the planet that has a public pro-

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curement regime as developed as ours and most nations would be
stunned by the quality of the work they’ve done.
In terms of the Federal Government norm, they are well above
average and, whether we want to be in the high B’s or the low A’s,
I think that’s complicated. But all you have to do—let’s keep in
mind what Allison Stanger just said: This was done in a hurry and
it was really important and everybody was watching it. Compare
it to the outcomes with the military contracting in Iraq, the military contracting in the State Department, and the aid contracting
in Afghanistan, compare it to the post-Katrina disaster contracting,
A-plus work.
Third, from an aspirational standpoint there’s always room for
improvement on a contract by contract basis. We can all sit down
and do better. Give them a little more time and a lot more staff,
a little bit of training, and some more best practices, there’s plenty
of room for improvement.
Mr. MCWATTERS. Fair enough. That was very helpful. Thanks to
all three of you.
Mr. SILVERS. Thank you, Mr. McWatters.
Dr. Troske.
Dr. TROSKE. First I’d like to thank all of you for your written testimony. I’m not an expert in this issue and I learned quite a bit
in reading it. Professor Schooner, I think I understand why you’re
here, because I thought your analysis of the things to look for and
the tradeoffs that are inherent in trying to achieve one goal versus
another were very useful for us to keep in mind. So I do appreciate
it. Professor Stanger, as a fellow chair of a department, I appreciate your efforts as well to even come here.
So I do want to—Professor Schooner, so you did—you did say
that sort of contracting at no profit is not unusual in the Federal
Government. For me that always raises an issue of, okay, so what
are they hoping to get at it? I’m not arguing that this is any different than what anybody else is doing. I’m just always concerned
to try to understand what’s motivating them for performing this
service, and if it’s not a profit motive then I struggle to sort of—
what else are they hoping to get out of it.
So maybe you could help me sort of understand. If they’re not
working for profit, what are they doing? You hinted at that a little,
but maybe you could expand on that.
Mr. SCHOONER. Unfortunately, I think the starting point is that
you and I are the wrong people to be having this conversation, to
the extent that we work at not-for-profit institutions and profit
does not drive the decisions we’ve made. I don’t know your background, but I’m assuming, like mine, you left an opportunity where
you were making significantly or a lot more money and had the opportunity to do so every day.
The point that I think I was trying to make earlier is, if we can
distinguish on the one hand the large community of not-for-profit
firms, which is staggering in government contracts, everything
from universities to Federally funded research and development
centers to think tanks—there’s a lot of sophisticated people with
mind-bogglingly wonderful talents that are not necessarily worried
about the marginal dollar and are more interested in participating
in the single most exciting jobs in the world.

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If you take the Jet Propulsion Laboratory or some of the other
Federally funded research places, they’re there because that’s
where the action is. That’s where the smartest are in the room and
it’s a privilege.
Having said that, I have not looked at the incentive and disincentive functions in the Fannie and Freddie contracts. Even if
there’s no incentives, I think there should be disincentives. But
again, I don’t have any unique examples on those two vehicles.
Dr. TROSKE. I guess I’d push back a little bit. Universities are
set up—Fannie and Freddie were set up supposedly as for-profit
companies and all of a sudden they seem to be switching in this
instance and all of a sudden doing something out of the goodness
of their heart. Universities have a traditional nonprofit motive, but
I can assure you I don’t think my next best opportunity exceeds
what I’m getting paid at the University of Kentucky. So I’m not
sure I’m as altruistic as you are.
I have raised the issue previously about sort of an inherent
moral hazard that exists when you contract with firms that you
also regulate. I guess I’d like to hear the three of you give me your
thoughts on that, and I’ll start with Professor Stanger. Should we
be looking at this somewhat differently when—and even if it’s not
Treasury that’s regulating. Even if it’s other arms of the Federal
Government regulating them, it does seem to me a bit odd.
Ms. STANGER. I would agree with you, and I think the way it has
developed is because slowly, over time, contracting has really become the business of government, with contractors performing
functions that really are the functional equivalent of those a government employee performs. Yet we have ethics standards and
guidelines that apply to Federal employees but don’t apply to contractors. So what this means is that, over time, as more of the
work of government is in private hands, more of the work of government is outside ethical norms designed to regulate government
behavior.
So what you have from this I think—and it’s fascinating—is this
blurring of the line between the private sector and public service.
This idea emerges that you can do both simultaneously. In other
words, the assumption is that we can wear multiple hats. We can
be working for a for-profit entity, but at the same time serving the
public interest in another realm; we can be administering—we can
be a financial agent of Treasury, yet at the same time be receiving
a bailout from Treasury.
I think we have to think a little bit about that blurring and question it, because I do believe it’s extraordinarily difficult to switch
hats, that interests enter the equation and often conflicts of interest. When we think about the standards that govern the behavior
of government employees, we don’t allow that. So let’s reflect on
what we want to expect from private sector employees who do work
for the government.
Dr. TROSKE. I will say one of the things that has struck me about
this entire financial crisis and the resulting efforts to stem it is the
blurring of those hats.
I’m out of time. I’m going to come back to the two of you in the
next round.
Mr. SILVERS. Thank you, Dr. Troske.

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We’ll move on to our second round of questions. I cannot help but
note with a certain amount of irony that each of us has a nongovernmental full-time job. Professor Stanger and Mr. Amey, if you
could respond to my prior question that Professor Schooner answered, which is that—which is if what we’re trying to do here, if
our goal—talk about our goals—if what we’re trying to do here is
to make sure that the assets of TARP are actually being managed
to the extent we’re asking contractors and agents to manage them,
actually being managed in our interests and not the contractors’,
in the public interest, not the contractors’ and agents’ interest or
their clients’ interests, what steps should we be taking? What
should this Panel be looking to have happen?
Mr. AMEY. I’ll try to start here. Well, I think it really gets to that
initial question, what are we buying. It really does lend itself then
to that outsourcing question. This kind of will help maybe answer
yours, if I may merge the two together, because I’m going to end
up in the same spot. That is, with outsourcing and insourcing, does
government have the capabilities that it needs to perform the functions and the jobs that it needs to meet its mission. That’s been a
problem, whether it’s been the defense industry—we do have
FFRDCs, we do have outside experts that are providing advice, we
do have Federal advisory panels that provide the government with
the advice that they need to make the decisions that they’re making, not just for 5 years out, not in emergency situations, but 10,
15, 20 years out.
That’s problematic, because who are we turning to for that?
We’re turning to the industry. The term here in Washington,
‘‘agency capture.’’ Some of these agencies are captured by the industry that they either regulate or oversee.
The fix I think is getting down to the conflict of interest standards. Professor Stanger just said, we have a problem with the
transparency in that world and we’re also not holding these people
accountable to the same standards that Federal employees are held
accountable to.
Mr. SILVERS. Let me stop you there. So let’s hypothesize for a
moment that there is a set—to take legal services, there’s a set of
knowledge about complex financial transactions that does not reside in the Federal Government, it’s just not there, and everyone
who has it, who has it with scale of resources—there may be some
individuals here and there, like academics, who have it, but anybody who’s got a team that has it—has as their clients TARP recipients. I’m not saying that these are necessarily facts, but let’s
hypothesize them.
What do we do about conflicts of interest in that—with that
setup? And by the way, let me say, the TARP recipients are going
to be these firms’ clients forever and TARP is going to go away.
Mr. AMEY. At that point, I would think that that’s where you
need to consider like a special government employee model, in
which you bring them in, you make them divest from certain aspects of their previous business relationships, personal relationships, divest from certain assets if they have personal assets that
they need to, to bring them in and put them in a position where
they can make independent judgments that are in the best interests of taxpayers and not on those outside entities or their own out-

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side involvement, and at that point try to divest them as much as
possible, but bring them in as a government employee for that
short time period, and then they can return to the private sector
in whatever their old capacity was.
Mr. SILVERS. Professor Stanger.
Ms. STANGER. I think you ask a great question, and there’s plenty of room for conflict of interest in all these TARP transactions.
There are rules that are supposed to govern conflicts of interest,
but they remind me a little bit of international law. You can delineate all these rules and regulations, but the main kicker is who’s
going to enforce them? To me that’s the central question, and that’s
why again I keep coming back to transparency, because you can set
all the rules in place, and they just don’t get followed. That is why
I am increasingly convinced that getting as much information out
in the public domain and encouraging self-policing behavior and
encouraging the American people to hold their government accountable is really the key.
Mr. SILVERS. In that vein, do you have any comment on our inability to get the Cadwalader firm before us?
Ms. STANGER. I think that’s inexcusable. Maybe I didn’t hear you
correctly. Who before you?
Mr. SILVERS. The Cadwalader firm. I don’t know if you were here
earlier.
Ms. STANGER. Yes, I heard that, and they should feel a moral obligation to be here and to provide that information.
Mr. SILVERS. In their defense, I should note that I don’t see how
they could appear, given that their client objected, absent a subpoena. I’m not sure that—they may feel that moral obligation, but
Treasury having barred them, I don’t know they could get here.
Ms. STANGER. Well, this is why I think we really just have to
change our whole notion of what acceptable levels of transparency
are, because so much of the work of government is in private
hands. Once we realize the transformation that has taken place,
which I try to outline in my book, then that brings you to the realization that without radical transparency, we’re slowly losing our
capacity for self-government.
Mr. SILVERS. My time is up, but Professor Schooner seems to be
very eager to get in and I’d hate to frustrate him further.
Mr. SCHOONER. I want to make a brief point and then another
response. On the Cadwalader issue, if this had been something
that someone was concerned about in advance, they should have
put it in the contract. That’s one of the things where if you have
a problem, a lot of these things can be dealt with proactively. After
the fact, you can’t fix them.
But I want to go back to something that Mr. Amey said because
I think it’s really important. The point that you made about the
conflicts and the fact that all of the talent may be in the private
sector in a certain sphere. The solution cannot be federalizing the
private sector or federalizing the talent pool. I’m not saying you
suggested that. But it’s a nation founded on private autonomy, and
Mr. Amey’s suggestion that we’re going to take talented people, derail their careers, put them in Federal service, have them divest
their holdings for the privilege of being forced into Federal service,

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that is not the way this nation operates and it can’t be the solution
in the long run.
Mr. SILVERS. Professor Schooner, I’ve got to allow Mr. Amey to
respond. I don’t think he was suggesting drafting anybody. Or did
I mishear you?
Mr. AMEY. No. No, there was no draft there. That’s exactly the
point, is there are people that would come forward. You have, for
whatever reason, Freddie and Fannie operated without profit. That
doesn’t necessarily make sense in the normal economic model. I
think that there are possible ways to get around these conflicts, because just mitigating them and coming up with firewalls—that
somebody is in a different building doesn’t seem to be adequate to
me.
Mr. SILVERS. Once again, I’ve run over. My fellow panelists will
have the opportunity to do so as well.
Mr. McWatters.
Mr. MCWATTERS. Thank you. I don’t have much.
Professor Stanger, you make the comment the Federal Government has been effectively hollowed out. I love that statement. How
do you fix that? What do you do about that?
Ms. STANGER. It’s a super question. I think people just don’t realize that the debate we have been having over the size of government misses a key point: government is big today in terms of the
amount of money it spends, but it’s actually never been smaller in
terms of the number of people it directly employs. So the natural
reaction when you point this out to people is they immediately say:
Oh my goodness, bring it back in house; we need more government
employees.
I respond that you really can’t turn the clock back, because
you’ve had this shift to government work being done by the private
sector. So if you simply bring more government employees in without acknowledging that shift, you’re not really going to change anything. You need to have more acquisitions professionals to manage
contracts, but they’re also going to have to be trained in a wholly
different way, because contracting has become, in my view, a strategic issue. It’s not procurement, this little realm off to the side,
but it’s central to what government actually does today.
Mr. MCWATTERS. Yes?
Mr. AMEY. If I may, there has always been the concept that outsourcing a lot of work that used to be performed by government
employees was going to add flexibility, was going to cut costs, and
was actually going to help upsurges when you needed talent to be
brought in immediately. The problem I have with that is I think
there is an argument that’s being missed, and that is there is flexibility lost by hiring contractors. Contractors can’t oversee other
government employees. Contractors can’t perform inherently governmental work. Contractors can’t do certain things. So by hiring
additional government employees to perform some of those functions rather than contractors, outside of the realm of inherently
governmental—that shouldn’t be outsourced in the first place, but
things that are closely associated, things that are critical to government functions—by hiring government employees to perform those
functions, you may actually add flexibility to the system rather

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than the old argument that outsourcing was going to add that flexibility.
Mr. MCWATTERS. Yes?
Mr. SCHOONER. Very briefly, if you’re fascinated with this topic
I can’t encourage you enough to read Paul Light, who is I believe
the best chronicler of this topic over the last decade or so.
This is an entirely bipartisan effort by government that now
spans two and a half administrations. It’s consistent with the global new public management regime. We have not been the leader on
this. We are following the rest of the world. Whether we agree with
it or disagree with it—I think Allison Stanger is entirely correct—
the genie’s out of the bottle. We’re not going back on this.
The question is how do we effectively manage it, and one of the
problems that we’re going to have, and it goes back to the other
questions, is we have a generation of government leaders that were
never trained to manage in a blended workforce. In the public policy schools, no one taught them how to manage contractor employees. The Office of Government Ethics is a generation behind on
dealing with the complexities of the workforce today.
It’s going to take a long time for us to manage this, but we got
there very, very rapidly, and some of the chaos that we have is
simply just not being ready for epochal change that has swept the
globe.
Mr. AMEY. Add one thought there. The same with organizational
conflicts. It’s part of the 2009 conflicts of interest rule. The problem
with it is—it’s a major problem right now. Consolidation in industries, whether it’s the defense industry, the IT industry, the medical and health field; I would imagine it’s here in the financial industry, that you have a problem where you have fewer people to
turn to.
In the old days we used to be able to buy missiles, boats, airplanes from multiple people. Now there’s about two companies that
work on Federal missiles, the DOD’s missile contracts. You know
what they did? They competed, there were some issues with ethics
there; then they created a joint venture. So at that point we have
the United Space Alliance and we have the United Launch Alliance
between Boeing and Lockheed. The government doesn’t have as
many places to turn.
So, as Professor Schooner says, the contracting system necessarily hasn’t also transformed to meet the needs of whether it’s
a blended workforce or the consolidation that exists currently in
contracting.
Mr. MCWATTERS. So if the government has been hollowed out,
under that standard in my prior question, Professor Schooner, you
gave basically A-plusses, Mr. Amey A-minusses, B-plusses, Professor Stanger more of a nuanced answer. So under a system which
none of you like, good grades generally. But if we change the whole
government contracting system, it could be a different result.
It’s just that Treasury today is playing by the game—playing by
the standards of today and they’re doing a good job by the standards of today.
Mr. SCHOONER. If I may make one simple point on this, it’s not
that it’s the government contracting game today. It’s the nature of
governance. We have outsourced governance. The procurement

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process is merely trying to facilitate a decision that’s been made at
a much higher political level. The people who are writing and negotiating and managing the contracts didn’t make the decision to hollow out the government. They’re just trying to fill in the holes.
Mr. MCWATTERS. Sure, sure. I accept that.
My time is up.
Mr. SILVERS. Thank you, Mr. McWatters.
Dr. Troske, your turn.
Dr. TROSKE. Thank you.
Mr. Amey, I’m going to come back to my—I think you did go a
little bit towards the issue that I raised, but maybe you could finish up, in terms of, do we think there should be differences and different considerations taken when we’re contracting with a heavily
regulated firm? Should that play some special role?
Mr. AMEY. I think so. I think we need enhanced conflict of interest rules overall in the government. This isn’t just a problem with
Treasury’s TARP conflict of interest rule. There have been personal
conflict of interest rules that have stagnated in the Federal Government. The organizational conflict rule has been proposed and
they just ended the comment period. So at that point these are
problems overall that the entire Federal Government is facing with
how to control contractors, how to handle conflicts of interest both
on the personal side as well as on the organizational side.
It’s also a problem with the length of these contracts as we talk
about, the upsurge is over. After Katrina, the upsurge was over
after a month, 2 months. Different people put different time
frames. But then you transition over to a reconstruction effort and
at that point when do you allow the rules then to take place to be
able to better handle those situations.
Some of these contracts that we’re entering are 3 years with multiple options, 5 years with options, 10 years with options. Those
types of contracts, we may want to ask what are we buying, to get
back to is this—is this a service that should be brought back in
house and be something being performed by government employees, to avoid those conflicts altogether, without having to nibble
around the edges of them.
Dr. TROSKE. Thank you.
Professor Schooner, I’ll turn to you.
Mr. SCHOONER. I think the short answer is you absolutely should
regulate firms, or you should do contracts differently with firms
that you’re already regulating. And one of the important things is
that requires a lot of money and it requires a certain skill set and
it requires a lot of discipline and resolve.
We have plenty of analogies, for example in Federal defense contracting. As Mr. Amey points out, we’re basically down to one and
a half, two nuclear sub providers. We’ve basically got full-time government employees that live in those spaces. We’ve got managers,
technical people, auditors and the like. But the key point here, and
this is what’s so relevant here: That’s expensive and it’s a resource
that could be used somewhere else, and it takes a fair amount of
discipline to keep applying money to something that people don’t
see as value added.
When the head of the agency comes in and says, I need this additional requirement met, the first thing to go is often oversight,

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post-award contract management, and all of the little non-perceived value-added duties that don’t contribute to the bottom line.
That’s where you’re going to have real troubles in the long term.
Dr. TROSKE. Let me stay with you, Professor Schooner. In your
opening statement you did sort of point out that I was pushing
Fannie, Freddie, and BNY Mellon about the form of their contracts
and the fact that it was cost-plus and didn’t seem to have a lot of
incentives. Yet, throughout your testimony so far you seem to indicate that putting incentives in those contracts can be quite valuable. As an economist, I 100 percent agree with that.
But you have also correctly pointed out that incentives can be a
very dangerous thing, because when you give them an incentive to
do something they do that, and that may not be exactly what you
want them to do. So give me a little thought about what ways you
think those contracts could be restructured to get them to perform
in ways that we would like them to perform? What incentives do
you think, or disincentives?
Mr. SCHOONER. Let me start. Mr. McWatters was concerned with
one of the providers that people were complaining about the fact
that they submit forms. So customer satisfaction, I think that’s one
of the most obvious ones. I put that in my testimony. I have been
baffled over an entire career in this place how ineffective the government is at assessing customer satisfaction. J.D. Power and its
competitors exist because the marketplace loves customer satisfaction. We know how to gauge it, we know how to quantify it, we
know how to reward it and we know how to punish it.
Once the Federal Government embraces that type of metricsbased approach, Federal Government procurement’s going to be
much better, and this is no different.
Dr. TROSKE. Thank you.
One sort of personal observation, since we talk about employment in the Federal Government. I was actually one of the employees. In a former life I was an employee of the Federal Government,
the U.S. Census Bureau. And I can tell you that we had contractors
then as well. You didn’t know who was a contractor and who
wasn’t. It’s one of the amazing things that the contractors work
with the other government employees; you often, unless you specifically ask them, are you a contractor or not, you don’t even know.
Mr. SCHOONER. That’s a modern era phenomenon, though.
Dr. TROSKE. Yes.
Mr. SCHOONER. It was not supposed to be that way, and in fact
the regulations specifically require the opposite. So part of this
blended workforce and the management of it is the phenomenon
that you discuss.
Dr. TROSKE. I guess since I have a couple extra, a minute or so,
maybe, Professor Stanger, I’ll ask you. The question about financial
performance—and we pushed a little bit regarding Fannie Mae and
Freddie Mac. It seems surprising to us that you would contract
with a firm that had just gone into bankruptcy. Is that something
that you would think you would generally want to take into account when thinking about contracting with a firm? And this
blended issue, the comments about, well, we thought that they
were already in conservatorship and so this was a convenient way

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to contract with them. Were you bothered by that, because I was.
So why don’t you comment on those thoughts.
Ms. STANGER. Yes, I was bothered by that, because it would seem
to me that if you were going to hire somebody to do work for you,
you wouldn’t want to hire the firm that had gone bankrupt doing
the same sort of work. So that immediately raises a red flag.
But I think the only way you can account for that—and I was
surprised when they said that it wasn’t the case—is that this was
part of the general bailout scheme, that you could help that firm
by infusing it with additional resources, and you had some confidence that they could do the work well, even though they’d gone
bankrupt.
Dr. TROSKE. You seem to want to chime in, Mr. Amey.
Mr. AMEY. Yes, two things. Contracting for convenience is never
a good idea. Second is, the government is supposed to contract, by
regulation and law, with responsible contractors only, and they’re
supposed to look at past performance. They’re supposed to look at
the prospective contractor’s integrity and efficiency. So I would ask
the question to the contracting officer, what did they look at to
make that responsibility determination, both from a past performance perspective as well as an integrity and ethics perspective.
Dr. TROSKE. Thank you.
Mr. SILVERS. Thank you, Dr. Troske.
We have one very brief further question, which has come up a
number of times and where we need your guidance as we prepare
our next report. There is an issue about the absence of pricing on
the Treasury website for some contracts, including some legal service contracts, some financial agent contracts, and the like. We
would be interested in your thoughts as to whether they’re doing
that right or not. We certainly took note of your general view that
the disclosure regime here is a very good one, but this particular
issue is in front of us. You can either answer it now or provide us
with an answer in writing; if in writing, please quickly.
Mr. SCHOONER. My guess is—and I don’t want to speak for
Scott—but as a general rule, I know that POGO and many of us
believe that more transparency is good, and the trend is going that
way. So it’s going to happen eventually. But I think if there’s one
simple theme that you want to keep in mind, if you want transparency on things like pricing or what some people view as proprietary data or information, tell the contractor in advance and they
can choose. If they don’t want to participate in that regime, they
don’t participate.
But the bottom line is, you want my money, I can put whatever
conditions on it I want. So I think it’s a simple one. If you wanted
it you should have required it.
Mr. AMEY. The Commonwealth of Virginia already does. In their
contracts they put a provision in that says that the state can share
that type of information, that it will be provided to the public.
I’d like to see more of it. Obviously, there is proprietary information that would need to be protected, but I don’t think we can just
throw a blanket over it all the time. If we’re supposed to be—most
of these contracts are commercial contracts. There is a commercial
marketplace for them. When you buy a car, you walk in and you
see the sticker price, so at that point you see all the markups and

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the individual price lines for the different things on it. I don’t see
a problem with the government requesting that information, and
that’s what Professor Schooner says: Let’s contract around it and
allow the talent pool to decide whether they want that contract or
not.
Ms. STANGER. To me it’s very simple. If it involves taxpayer
money, information on pricing should be available to the public.
Mr. SILVERS. Thank you. The Panel appreciates your willingness
to take our last question.
With that, we’ll conclude the testimony for today’s hearing.
Thank you to this panel and to all of our witnesses. The Panel
greatly appreciates your taking the time and effort to join us today.
Thank all of you for being here today.
With that, this hearing is adjourned.
[Whereupon, at 12:56 p.m., the hearing was adjourned.]

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