[Senate Hearing 111-901]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-901
 
           TREASURY'S USE OF CONTRACTING AUTHORITY UNDER TARP

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                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

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                           SEPTEMBER 22, 2010

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        Printed for the use of the Congressional Oversight Panel


           TREASURY'S USE OF CONTRACTING AUTHORITY UNDER TARP





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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                      Damon Silvers, Deputy Chair
                           Richard H. Neiman
                           J. Mark McWatters
                           Kenneth R. Troske



                            C O N T E N T S

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                                                                   Page
Opening Statement of Damon Silvers, Deputy Chair, Congressional 
  Oversight Panel................................................     1
Statement of J. Mark McWatters, Member, Congressional Oversight 
  Panel..........................................................     6
Statement of Kenneth R. Troske, Member, Congressional Oversight 
  Panel..........................................................    11
Statement of Gary Grippo, Deputy Assistant Secretary for Fiscal 
  Operations and Policy, U.S. Department of the Treasury.........    16
Statement of Ronald Backes, Director, Procurement Services, U.S. 
  Department of the Treasury.....................................    18
Statement of Joy Cianci, Senior Vice President, Making Home 
  Affordable, Fannie Mae.........................................    37
Statement of Paul Heran, Program Executive, Making Home 
  Affordable--Compliance, Freddie Mac............................    46
Statement of Mark Musi, Chief Compliance and Ethics Officer, Bank 
  of New York Mellon.............................................    55
Statement of Steven Schooner, Professor of Law and Co-Director of 
  the Government Procurement Law Program, the George Washington 
  University School of Law.......................................    73
Statement of Hon. Scott Amey, General Counsel, Project on 
  Government Oversight...........................................    86
Statement of Allison Stanger, Russell J. Long '60 Professor of 
  International Politics and Economics and Chair of the Political 
  Science Department, Middlebury College.........................    98


         TREASURY'S USE OF CONTRACTING AUTHORITY UNDER THE TARP

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                     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.

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, public- spirited, 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.
    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.
    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:]


    [GRAPHIC] [TIFF OMITTED] 65080A.001
    
    [GRAPHIC] [TIFF OMITTED] 65080A.002
    
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's-length basis.
    Since Treasury also engaged Fannie and Freddie to modify 
GSE-owned 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 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.
    [GRAPHIC] [TIFF OMITTED] 65080A.003
    
    [GRAPHIC] [TIFF OMITTED] 65080A.004
    
    [GRAPHIC] [TIFF OMITTED] 65080A.005
    
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.
    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 significant 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.
[GRAPHIC] [TIFF OMITTED] 65080A.006

[GRAPHIC] [TIFF OMITTED] 65080A.007

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 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 women-owned.
    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 exception 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.

  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 
long-range 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 contract 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 chartered 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 in- source 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 prominent, 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?
    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 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. 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, 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 self-reporting, 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 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 
long-term 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 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.
    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.]
    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.

  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.
    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 non-GSE 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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    Mr. Silvers. Thank you, Ms. Cianci.
    Mr. Heran.

    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; 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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    Mr. Silvers. Thank you, Mr. Heran, for your testimony.
    Mr. Musi.

 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 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 obligations 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 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?
    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 at-risk 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 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 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 broker-dealer, 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?
    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?
    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 full-time.
    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?
    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?
    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 cost-plus 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 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.

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.
    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 contracts 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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    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.

   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 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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    Mr. Silver. Thank you, Mr. Amey.
    Professor Stanger.

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.
    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 sub-awards 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 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 open-
ended 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 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 procurement 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.
    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.
    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 outside 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, 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 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 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, 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 metrics-
based 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 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 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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