S. HRG. 111–901 

TREASURY’S USE OF CONTRACTING AUTHORITY 

UNDER TARP 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 22, 2010 

Printed for the use of the Congressional Oversight Panel 

( 


rfrederick on DSKD9S0YB1PROD with HEARING
TREASURY’S USE OF CONTRACTING AUTHORITY UNDER TARP 


rfrederick on DSKD9S0YB1PROD with HEARING
U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

65–080 2011

S. HRG. 111–901 

TREASURY’S USE OF CONTRACTING AUTHORITY 

UNDER TARP 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 22, 2010 

Printed for the use of the Congressional Oversight Panel 

( 


rfrederick on DSKD9S0YB1PROD with HEARING
(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

DAMON SILVERS, Deputy Chair 

RICHARD H. NEIMAN

J. MARK MCWATTERS

KENNETH R. TROSKE


rfrederick on DSKD9S0YB1PROD with HEARING
(III) 

C O N T E N T S 

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 


rfrederick on DSKD9S0YB1PROD with HEARING

rfrederick on DSKD9S0YB1PROD with HEARING
(1) 

TREASURY’S USE OF CONTRACTING 

AUTHORITY UNDER THE TARP 

WEDNESDAY, SEPTEMBER 22, 2010 

U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Washington, DC. 

The Panel met, pursuant to notice, at 10:05 a.m. in room SR– 

428A, Russell Senate Office Building, Washington, DC, Damon Silvers, presiding. 

Present: Mr. Damon Silvers (presiding), Mr. J. Mark McWatters, 

and Dr. Kenneth R. Troske. 

OPENING STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Good morning. This hearing of the Congressional 

Oversight Panel will now come to order. My name is Damon Silvers 

and I am the Deputy Chair of the Congressional Oversight Panel 

for the Troubled Asset Relief Program. 

I want to begin by noting the absence of our former Chair, Professor Elizabeth Warren, who recently resigned from the Panel to 

take on the difficult and important task of establishing a new Consumer Financial Protection Bureau. 

The Panel’s work is a joint endeavor and its accomplishments are 

shared by all of its members and its very dedicated staff. Even so, 

our work would be impossible without the—would have been impossible without the fierce, uncompromising leadership of Professor 

Warren. Her insistence that the TARP was created to help every 

American, not just those on Wall Street, remains the guiding principle of our work. We owe her a deep debt of gratitude. 

On a personal note, let me say that I was often asked in the context of my service on the Panel with Elizabeth what Elizabeth was 

like to work with. And I always answered that she is exactly as you 

see her when she chairs these hearings: straightforward, publicspirited, generous, and yet exacting. 

We will miss her deeply at the Oversight Panel, but our loss is 

President Obama’s and our nation’s gain. 

We are here today to examine Treasury’s use of private contractors under the TARP. In the minds of most Americans, the TARP 

is a government program designed by Congress and paid for by taxpayers to promote a public purpose, the stability of our economy. 

But in many ways the TARP today no longer looks like a government program. Many of its most critical functions are managed by 

private companies operating under 83 different contracts and 

agreements worth about $445 million. 


rfrederick on DSKD9S0YB1PROD with HEARING
2 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
3 

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:] 


rfrederick on DSKD9S0YB1PROD with HEARING
4 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 13 here 65080A.001
5 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 14 here 65080A.002
6 

STATEMENT OF J. MARK McWATTERS, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. MCWATTERS. Thank you, Mr. Silvers. I very much appreciate 

the attendance of the witnesses and I look forward to hearing their 

views. 

The Department of Treasury is authorized under the Emergency 

Economic Stabilization Act of 2008 to enter into procurement contracts and financial agency agreements in order to discharge its duties under the statute. Financial agency agreements allow Treasury 

to retain private sector businesses to perform inherently governmental and perhaps other functions and procurement contracts are 

employed by Treasury to obtain other goods and services from private sector organizations. 

Today’s hearing will examine Treasury’s use of procurement contracts and financial agency agreements to obtain services that 

Treasury cannot or has chosen not to perform itself. In order to add 

some perspective to the materiality of the issues before us today, 

it is worth considering that the potential value of procurement contracts between Treasury and third party service providers totals 

approximately $400 million, roughly $85 million of which relates to 

limited competition contracts issued due to unusual and compelling 

urgency. 

It will be interesting to learn the circumstances that justified the 

issuance of the limited competition contracts, as well as why only 

four service providers were awarded approximately $250 million in 

potential value procurement contracts. 

It is also worth noting that Treasury has entered into financial 

agency agreements with Fannie Mae and Freddie Mac that have an 

obligated value of approximately $220 million. Since Fannie and 

Freddie were all but nationalized in September 2008, it will be interesting to learn why Treasury chose to enter into significant contractual arrangements with two failed government-sponsored enterprises instead of with solvent private sector organizations, and if 

Treasury was able to obtain services from the GSEs on an arm’slength basis. 

Since Treasury also engaged Fannie and Freddie to modify GSEowned and guaranteed loans, it is critical that the two GSEs address how they mitigated any conflict of interest that has arisen 

with respect to their financial agency agreements. 

EESA requires Treasury to establish and maintain an effective 

system of internal controls to provide reasonable assurance of the 

reliability of financial reporting, including financial statements and 

other reports for internal and external use. In addition, fundamental questions—fundamental elements of this Panel’s mandate 

are to examine the extent to which the information made available 

on transactions under the TARP have contributed to market transparency and to ensure that the use of TARP authority is subject 

to public accountability. 

As such, one goal of today’s hearing is to determine if Treasury, 

the procurement contractors, and the financial agents have adopted 

a set of best practices with respect to the development and implementation of their internal control systems and have taken such 

other necessary and appropriate action so as to ensure market 


rfrederick on DSKD9S0YB1PROD with HEARING
7 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
8 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 19 65080A.003
9 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 20 65080A.004
10 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 21 65080A.005
11 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
12 

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 sigVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
13 

nificant number of current and former TARP recipients as clients 

of the firm, including Bank of America, Citigroup, and AIG. We 

will be noting the results of this request and of our meeting with 

Cadwalader as part of our October report. 

With that note, Mr. Grippo, please proceed with your testimony. 

Statements are limited to 5 minutes. Proceed. 


rfrederick on DSKD9S0YB1PROD with HEARING
14 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 28 65080A.006
15 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 29 65080A.007
16 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
17 

the principal-agent relationship, under which a financial institution 

is empowered to act for and on behalf of the Treasury as the principal to carry out certain authorities based on a defined scope of 

agency. 

Financial agents have a fiduciary obligation to the Treasury, including the requirement to act in the best interests of the Treasury 

and not in their own interests. Accordingly, only financial agents 

and not contractors have been authorized to perform certain duties 

under the Act. This approach is consistent with the Treasury’s 

longstanding policy of allowing only financial agents and not contractors to hold and manage public moneys. 

The decision to designate a financial agent to perform some activity under the Act, as opposed to engaging a contractor, begins 

with the consideration of two key questions: One, does the activity 

entail the direct management of public assets, such as the purchase, valuation, custody, or disposition of investments or cash? 

Two, does the work entail a close collaboration between the Treasury and the provider such that a fiduciary relationship is required? 

Financial agents are engaged when the Treasury needs to obtain 

the inherent capabilities and special expertise of a financial institution and where the Treasury needs the services of an entity that 

can act as an extension of the Treasury. 

Although the Treasury uses contractors and financial agents 

under different authorities and for different purposes, in both cases 

Treasury has the goal of engaging the entity best qualified to perform the function at a price that represents fair value to the taxpayer. 

The process for the solicitation, evaluation, and selection of financial agents embodies the best practices for third party sourcing: 

openness, fairness, competitiveness, and transparency. We’ve created an Office of Financial Agents with dedicated staff to manage 

this process. Moreover, all the financial agent arrangements are designed to encourage and facilitate the involvement of small financial institutions. The notices soliciting financial agents and the 

agreements designating financial agents contain evaluation criteria 

and requirements related to small financial institutions. Indeed, a 

majority of the current financial institutions designated as financial agents to help implement the Act, 8 out of 15, are small institutions, including six institutions that are minority or womenowned. 

In addition, the directly designated financial agents have themselves engaged 26 small firms as sub-providers, including 18 that 

are minority or women-owned firms. Moreover, 23 small and minority, women, and veteran-owned broker-dealers have participated 

as co-managers for the auctions of warrants and the sales of common stock. 

We work diligently to identify and prevent any conflicts of interest related to our use of financial agents. In enforcing the TARP 

conflicts of interest interim rule, we work with financial agents as 

well as independently to identify and mitigate potential organizational and personal conflicts of interest that may arise during the 

retention of the agents and during the performance period of their 

agreements. With one exception, conflicts of interest mitigation 

plans have been in place before work activity begins, the one excepVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
18 

tion being the very first provider hired under TARP, the Bank of 

New York Mellon, which had a co-signed mitigation plan within 2 

days of signing the agreement. We’ve remained engaged with financial agents to continually assess any new conflicts, to develop 

changes to mitigation plans over time. 

Let me jump ahead and just indicate that we agree with the 

Panel that contracting and engaging Fannie financial agents is extremely important in the administration of the Act, and I want to 

thank you for the opportunity to discuss these issues today. 

Mr. SILVERS. Thank you, Mr. Grippo. We should note that I extended you the courtesy of some extra time, given that you had a 

matter you had to take care of first. 

Mr. Backes. 

STATEMENT OF RONALD BACKES, DIRECTOR, PROCUREMENT 

SERVICES, U.S. DEPARTMENT OF THE TREASURY 

Mr. BACKES. Good morning, members of the Congressional Oversight Panel. Thank you for the opportunity to testify today. As Director of Procurement Services for Treasury’s departmental offices, 

a position I’ve held since May of this year, I’m responsible for overseeing contract operations supporting Treasury headquarters and 

aligned clients, including the Office of Financial Stability, which 

has requirements for contracts that support the Emergency Economic Stabilization Act. From February of 2009 through May of 

2010, I served as the contract administration manager for OFS, responsible for implementing and overseeing contract planning and 

administration for the Troubled Asset Relief Program, TARP. 

I’m here today in response to the Panel’s request to provide an 

overview of Treasury’s contracts. Treasury acquires products and 

services pursuant to the Federal Acquisition Regulation, or FAR, as 

supplemented by agency regulations. Although EESA explicitly authorized the Secretary to waive the FAR to respond to the financial 

crisis, we made a deliberate decision not to do so for any TARP 

contracts. Treasury has contracted for document management, 

legal support, accounting, internal controls, information technology, 

and similar services in support of TARP, all using FAR-based procurement methods. 

The Government Accountability Office has monitored TARP contracting from the inception of the program and has repeatedly recognized our strengths in this area. Rather than making a choice between doing things fast and doing things right, we chose to do 

both. 

In the fall and winter of 2008 during the heat of the financial 

crisis, we leveraged existing contracts where available, conducted 

full and open competitions when feasible, or else limited competitions under the authority of the FAR, to ensure an effective and 

timely response to the crisis. We reviewed potential contractors to 

ensure they did not have disabling conflicts of interest and maintained acceptable conflict of interest mitigation plans. 

As the program matured, OFS developed work requirements beyond those meeting its urgent needs and developed mid- and longrange strategies for contracts to transition to full and open competitions and small business set-asides to meet all the TARP contracting needs. We enhanced existing mechanisms to match conVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
19 

tract costs, schedules, and quality, and formalized conflict of interest procedures. OFS developed its acquisition strategy through a 

Contract and Agreement Review Board, or CARB, chartered in part 

to review long-term requirements for OFS to ensure consistent and 

effective planning for contracts and financial agent agreements and 

to provide a forum for high-level review of acquisition plans to 

achieve OFS mission and regulatory goals. 

Before deciding to use contractor services, Treasury addresses 

the relevant tradeoffs between contractor and government performance. The decision to acquire contractors through a contract begins 

with the consideration of whether the required services are other 

than inherently governmental in nature, whether they can be obtained at a competitive price from the private sector without creating an immitigable conflict of interest, and whether it would be 

more cost effective for schedule or other reasons to outsource the 

work. 

The contract selection process entails a competitive solicitation 

and evaluation to identify the proposal or proposals that represent 

the best value to the Treasury, considering cost and other factors 

identified in the solicitation. In the case of most contracts awarded 

in the first year in support of the TARP, Treasury either fully competed the work using General Services Administration, GSA, schedule contracts or held limited competitions pursuant to the unusual 

and compelling urgency authority of the FAR. 

Treasury followed the same basic process for unusual and compelling urgency procurements as for traditional procurements, including the conduct of market research to identify the best qualified firms to whom Treasury released the solicitation, a competitive 

evaluation, and consideration of conflicts of interest, if any, prior 

to selection. 

For conflicts of interest, Treasury reviews the scope of work and 

the type of organization that may be selected at the inception of a 

contract or task order to identify circumstances that might give 

rise to an organizational or personal conflict of interest. Treasury 

includes conflict of interest provisions in the resulting contract or 

task order. Every offeror seeking a contract for services other than 

administrative services, such as building, leased furniture, newspaper subscriptions, and the like, must provide a conflict of interest 

mitigation plan and identify actual, potential, or apparent organizational and personal conflicts of interest as part of its proposal. 

Treasury reviews the plan and, if appropriate, requires additional 

information and a revised conflict of interest mitigation plan. Contracts, including task orders issued under existing contracts, are 

not awarded and contract work does not begin unless the associated proposed mitigation plan is determined to be acceptable. 

In addition, mitigation plans are revisited and, if necessary, revised if warranted by the circumstances, such as when the business 

structure of the contractor changes or when additional work is ordered under the contract. 

Treasury employs several layers of internal controls associated 

with contract performance, including contracting officer oversight 

and monitoring, delegation of day to day monitoring to certify 

COTRs, and internal management reviews. In addition, OFS charVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
20 

tered the CARB to review and monitor administration of all OFS 

contracts to ensure consistent and effective program management. 

As we approach 2 years since the passage of EESA, Treasury has 

successfully implemented an effective acquisition strategy that enables delivery of timely support for critical legal, financial, and information technology needs and continues to maximize competition 

and small business participation to support—— 

Mr. SILVERS. Mr. Backes, can you wind up, please. 

Mr. BACKES. Yes, I will. Thank you. 

Through these actions, as acknowledged by the GAO, Treasury 

has strengthened its management and oversight of vendor-related 

conflicts, substantially increased the share of work performed by 

small businesses under TARP contracts, and put in place clear procedures to address actual, potential, or apparent conflicts that may 

arise. 

We agree with the Panel that contracting and engaging financial 

agents is extremely important in the administration of the EESA, 

and I thank you for the opportunity to discuss this today. 

[The prepared statement of Messrs. Grippo and Backes follows:] 


rfrederick on DSKD9S0YB1PROD with HEARING
21 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 42 65080A.008
22 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 43 65080A.009
23 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 44 65080A.010
24 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 45 65080A.011
25 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 46 65080A.012
26 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 47 65080A.013
27 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 48 65080A.014
28 

Mr. SILVERS. Thank you both for your testimony. 

We will now have a round of questions, 5 minutes with each panelist. 

Mr. Grippo and Mr. Backes, in each of your areas of operation 

can you explain to the Panel how you go about determining what 

functions—how you went about and go about determining what 

functions in the TARP program are suitable to be executed internally by government personnel and which ones should be 

outsourced? 

I note—the Panel understands the ‘‘inherently governmental’’ 

test that applies under traditional contracting. That is sort of obviously not the point in relation to financial agents. But we assume 

that there are financial agent-type functions that are done internally. So how do you draw those distinctions? Mr. Grippo first. 

Mr. GRIPPO. Sure. Mr. Silvers, there are two or three key criteria. The first is whether the government has or can reasonably 

put in place an infrastructure for a particular function. For example, if we need capital markets expertise and we do not have a 

trading desk, which we do not, we would naturally look to 

outsource that function to a firm that does capital markets trading, 

since that is not a function that the Treasury does. 

Secondly, we look to whether we need an objective third party to 

perform some function. So if we are looking for the valuation of an 

asset or advice on potential structurings of an investment where 

we really do want independent advice and the public is looking for 

us to get independent validation of our actions, we would look to 

likely designate a financial agent. 

Probably the third criteria, which was most important at the outset of implementing TARP, related to time to market. Given the urgent circumstances of the crisis, it was in many cases best to engage a third party to implement something quickly. So as an example, the Bank of New York Mellon, which we engaged within about 

10 days of the passage of the statute, we brought to bear dozens 

of individuals to help us begin implementing the Act. 

So the criteria are—do we have the infrastructure or not, do we 

need an objective or independent third party, and what is the time 

to market consideration. 

Mr. SILVERS. Thank you. 

Mr. Backes. 

Mr. BACKES. In the realm of Federal contracts it’s a little more 

standard, but at OFS we implemented a Contract and Agreement 

Review Board, which I mentioned, which brought essentially the 

OFS personnel and executives across Treasury together to contemplate those specific strategies as to whether we would go to insource opportunities, whether we would go to contract or financial 

agents, and to deliberate on those, reviewing the short-term need 

versus the long-term requirement and what we could do, and review strategies for both, getting it today and getting it in the long 

term. 

On a case by case basis, each action that is proposed for a contract will have a specific plan, in which we engage in tradeoffs on 

whether it makes sense to keep it in house or to go to contract. 

Several of the considerations that we engaged in in some of the 

deliberation, the ‘‘inherently governmental’’ discussion was promiVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
29 

nent, as well as whether it was available as a non-personal service 

contract and precludes us from hiring staff, if you will. 

Mr. SILVERS. Can I stop you there for a second. How do you look 

at legal services in relation to the framework you’ve laid out? It’s 

not money management. 

Mr. BACKES. No. 

Mr. SILVERS. And the government obviously has a lot of lawyers. 

So give me a little insight into that? 

Mr. BACKES. Well, legal services weren’t seen as an agent. 

They’re let on contract. Legal services are commonly available in 

the commercial marketplace. So we looked to law firms where 

Treasury didn’t have, at the time, existing Federal expertise within 

the Federal workplace. 

Mr. SILVERS. So you look more broadly than simply what’s available within the Treasury Department when you make these—when 

you go through this type of analysis? 

Mr. BACKES. Certainly, certainly. 

Mr. SILVERS. But it’s peculiar to me—and perhaps you can explain to me—why you don’t view lawyers as sort of agents with fiduciary—in a sort of fiduciary context. That’s generally how lawyers are understood to operate, although obviously they don’t have 

discretion over funds. Can you explain that to me? 

Mr. BACKES. We’re not looking at lawyers as individuals. 

Mr. SILVERS. Law firms. 

Mr. BACKES. When we approach a contract relationship, we look 

at whether we can create that arm’s length relationship that would 

exist in the commercial marketplace, and we recognize law firms 

as within that realm. So we can contract for legal services and then 

they’re provided. Those law firms are seen as providing an expertise in a certain area. 

Now, I acknowledge your concern in the opening statement that 

was made regarding Cadwalader and the special relationship, and 

we did have deliberations about that relationship. But we recognized them as available through contract. 

Mr. GRIPPO. And, Mr. Silvers, I would just add that the authority 

to designate financial agents of the United States, both in the Act 

and in other statutes, is limited to financial institutions. So there’s 

no statutory authority that I’m aware of that would allow us to legally designate a law firm as an agent or a party standing in our 

shoes. 

Mr. SILVERS. No, I meant the agent in the generic sense, rather 

than in the specific sense. I clearly understand that they are not 

within the financial agent space. 

With that, my time has expired. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

Gentlemen, Fannie and Freddie failed 2 years ago. They were 

bankrupt. They would have been liquidated, closed down, but for 

the fact they were taken into conservatorship, something unusual. 

The Congressional Budget Office has estimated that the bailout of 

those two institutions will cost the taxpayers approximately $389 

billion. Given that, given that they have not been managed in the 

best way, why award them contracts that total $220 million? Why 

not someone else? Why not someone from the private sector? 


rfrederick on DSKD9S0YB1PROD with HEARING
30 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
31 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
32 

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, 


rfrederick on DSKD9S0YB1PROD with HEARING
33 

ultimately we are the ones who are determining whether the conflicts have been mitigated. 

I can say that we have not had a case, certainly not with any 

financial agent, and I’m not aware of any instances with contractors, where we have gone ahead and engaged a third party where 

there was an unmitigated conflict of interest. All actual and potential conflicts of interests must be directly addressed to our satisfaction before we move forward with engaging a party or doing work. 

Mr. SILVERS. Now, some people, including the American Bar Association, have been critical of the process under the 2009 conflict 

of interest rules that essentially provides for self-reporting. Now, 

can you tell me when a—two things. One is, when a firm self-reports, what is your check on the accuracy of their self-reporting? 

Then, two, as they self-report, what do you do with that data? Because I can imagine in the case of, say, Morgan Stanley or 

Cadwalader that it’s essentially a continuous stream of self-reports. 

Where does that information go and what is done with it? 

Mr. GRIPPO. Let me first put self-reporting in context. We of 

course issued a regulation on conflicts of interest. The regulated 

parties in those instances were the providers. So that regulation 

did not include the things we do ourselves, because obviously we 

don’t need to issue a regulation to govern ourselves. 

Nevertheless, independently we evaluate the conflicts posture of 

all agents and contractors ourselves. So as the institutions are selfreporting, we ourselves, through a pretty extensive compliance office, are looking at the business lines of each vendor, their customers and partners, their affiliates. 

Mr. SILVERS. Mr. Grippo, are you saying that basically the ABA 

didn’t understand, that in fact you are doing your own independent 

assessment of conflicts of your financial agents? 

Mr. GRIPPO. We indeed independently review the conflicts posture of all the agents. 

Mr. SILVERS. Then can you tell me how—again, what your management process is of the self-reporting that you get, particularly 

with respect to what the Panel sort of assumes is a fair amount 

of volume that you’re getting in reports from your various agents 

and, in Mr. Backes’ realm, contractors? 

Mr. GRIPPO. Yes. There is a continuous stream of self-certifications and reports on conflicts posture, at least quarterly in most 

cases. Frankly, we have either monthly or quarterly management 

reviews with certainly all of our agents, where we are asking those 

firms to bring to us key management officials, attorneys, sometimes internal auditors, to explain any changes in their corporate 

structure, their customers, their business lines, their key personnel, so that we can make a determination as to whether their 

conflicts of interest mitigation plan needs to be updated. 

Mr. SILVERS. Can I ask you specifically with respect to money 

management firms and law firms, where the range of conflicts is 

to my view greatest. What in your experience constitutes an 

unmitigatable conflict? 

Mr. GRIPPO. An unmitigated conflict—— 

Mr. SILVERS. Not unmitigated, but unmitigatable. 

Mr. GRIPPO [continuing]. Would be, obviously, hiring a TARP recipient to manage TARP assets. And in fact, the conflict of interest 


rfrederick on DSKD9S0YB1PROD with HEARING
34 

mitigation regulation goes specifically to issues like that and in the 

regulation itself declares these are unmitigated—these are conflicts 

that cannot be mitigated and we will not permit these kinds of activities. 

There are other examples, I believe, in the conflicts of interest 

regulation like that. 

Mr. SILVERS. My time has expired. Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

Help me understand what unusual and compelling circumstances 

justified the issuance of $85 million of contracts without going 

through the usual competitive bidding process? 

Mr. BACKES. The urgent and compelling authority that’s prescribed by the Federal regulations gives us the ability to streamline 

the competitive process, not to ignore the competitive process. So 

in the case of our early contracts, where we needed to bring on private sector expertise quickly to help support our response to the 

crisis, we went through a process very similar to the formal competitive process. We conducted our market research. We developed 

a statement of need, a statement of work, and put that out to the 

firms that we were able to determine most likely to be qualified. 

We used resources that were readily available. We used expertise 

reaching within the Department and also at other agencies where 

others might have had similar contracts. We used Federal databases of contracts to look for similar contracts elsewhere and then 

reach out to make contacts very quickly. 

The idea at the outset of the program, at the inception, was that 

we needed to respond quickly, but we did it in a way that we were 

going to do it, as I mentioned, right. 

Mr. MCWATTERS. As the exigencies have dissipated, have you 

opened these contracts up to competitive bidding or are they longterm contracts? 

Mr. BACKES. No. One of the limitations on using that authority 

is to meet the minimum needs of the government at the time. So 

we entered into short-term contracts that in other circumstances 

would be seen as debilitating, because we have to go through a procurement exercise in the near term. Our short-term response was 

to get contracts in place to help us immediately. Mid- range, we expanded that out to bring in multiple firms. 

I want to address a question earlier also. Our preferred method— 

legal services is a good example—is not to have a single firm available under contract, but to have multiple firms. Therefore, we 

would have a competitive environment going forward, not locked 

into a single source for a particular thing, and also the ability to 

mitigate conflicts. So if a particular firm had or a conflict arose 

later on, we would have other firms that we would be able to draw 

upon to meet the need. 

Mr. MCWATTERS. Right. But if that is the case, why does one law 

firm, Cadwalader, have a potential value of their contracts at $147 

million? Why isn’t that split out among a dozen law firms, or at 

least four or five other law firms? In fact, $250 million of potential 

value procurement contracts are shared among Cadwalader, Simpson Thatcher, E&W, and PWC. I can understand the two accounting firms since we only have four left, unfortunately. But the law 


rfrederick on DSKD9S0YB1PROD with HEARING
35 

firms, there’s plenty of law firms and they’re happy to take your 

business the last time I checked. 

Mr. BACKES. Yes, and I do appreciate your concern deeply. 

To finish the thought, the long-term strategy, which is now bearing fruit, is to have a full and open competition among all of the 

law firms that are interested in doing business with the TARP. We 

just recently awarded 13 contracts with a potential value of $99.5 

million, I believe is the right number. That $99.5 million is not one 

ceiling on one contract, but that’s the program value. So among 

those 13 firms, they’ll compete for that potential value. 

That’s also the case in the previous iterations, where we have 

awarded multiple contracts for particular engagements. In the example of the bankruptcy program, we awarded contracts to three 

firms who competed for a potential value of $26 million. One firm 

has achieved significant dollars under the contract because of the 

work they did and because of their success and their effectiveness 

at representing us. 

Mr. MCWATTERS. Okay. I’d like to—well, I’m not sure if I have 

time to do this. Well, Professor Stanger—and I hope I’m pronouncing her name correctly—I want to read you guys something: 

‘‘The business of government is increasingly in private hands and 

there is a broad consensus that the current Federal contracting 

system is antiquated, ill-equipped to deal with the surging demands placed upon it. It is not unfair to say that the TARP was 

a bailout of the financial system, administered by the financial system, with all the potential conflicts of interest that inevitably arise 

when the regulators are simultaneously the regulated.’’ 

Any comments on that? 

Mr. GRIPPO. All programs established under TARP, every single 

investment decision made under TARP, were made by employees 

of the government. Not a single dollar has been allocated based 

upon the discretion of a private party. We have made all the investment decisions under this statute. 

Mr. MCWATTERS. My time is up. I’ll ask Professor Stanger to 

elaborate also. 

Thank you. 

Mr. SILVERS. Thank you, Mr. McWatters. 

Dr. Troske. 

Dr. TROSKE. I’d like to continue with what Mr. McWatters was 

pushing on. Give me your thoughts on the appropriateness of a regulatory body—and Treasury does have regulatory authority, as do 

other entities in the Federal Government—while the Federal Government is also simultaneously contracting with firms that it regulates. That seems to me to present a large moral hazard problem 

that it seems difficult to overcome. 

I guess I’d like—you’ve done this for a while, much longer than 

me. Give me your thoughts on that. 

Mr. GRIPPO. There is a clear separation between the regulatory 

authority in the Treasury, embodied in the OCC, the OTS, what 

have you, and the policy and political authority in other areas of 

the Department. We have taken great pains, and indeed the regulatory agencies would take great pains, to make sure that that separation in the law between those two parts of our business is never 

breached. 


rfrederick on DSKD9S0YB1PROD with HEARING
36 

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.] 


rfrederick on DSKD9S0YB1PROD with HEARING
37 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
38 

We launched a ground campaign with borrower outreach events 

in markets hard-hit by the foreclosure crisis, where homeowners 

can meet with servicers and HUD-approved housing counselors. So 

far we have held 44 events that have attracted a total of nearly 

45,000 homeowners. We also created a public service advertising 

campaign in English and Spanish, in partnership with the Ad 

Council. 

A fourth key duty is serving as facilitator to the servicer paying 

agent, Bank of New York Mellon. We calculate the incentive payments to be paid by the agent to servicers, borrowers, and/or investors as appropriate, and to date we have facilitated the payment 

of $770 million in these incentives, including both GSE and nonGSE payments. 

A fifth key duty is serving as record-keeper for executed loan 

modifications and other Program activities. We developed and 

launched a dedicated systems platform known as IR2 and we continue to enhance the platform. According to the MITRE Corporation, an independent consulting and research firm engaged by 

Treasury, we were able to create the IR2 system of records substantially faster, more efficiently, and at a substantially lower cost 

than comparable systems in the industry. 

Now let me touch on two specific relevant topics. With respect to 

compensation, Treasury pays Fannie Mae for its work according to 

an agreed-upon budget. The budget is set at cost with no markup 

for profit. Treasury can withhold payment if we fail to meet established deliverables and milestones, which it has not done to date. 

Fannie Mae has not received any incentives from the Program. 

Finally, in carrying out the Program Fannie Mae strictly enforces 

its obligation to comply with Treasury’s conflict of interest regulations in all required areas. We have established firewalls that restrict the flow of information between Program personnel and other 

personnel not working on the Program. We restrict access to systems containing Program-related information. We also require employees involved in the Program to sign nondisclosure agreements 

and we require training, monitoring, and auditing related to our 

conflict of interest obligations. 

In closing, we take our role as Treasury’s Program Administrator 

very seriously. We have a lot more work to do. We are committed 

to our role in supporting Treasury’s efforts to make the Program 

work for struggling homeowners. 

Thank you. 

[The prepared statement of Ms. Cianci follows:] 


rfrederick on DSKD9S0YB1PROD with HEARING
39 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 78 65080A.015
40 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 79 65080A.016
41 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 80 65080A.017
42 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 81 65080A.018
43 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 82 65080A.019
44 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 83 65080A.020
45 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert graphic folio 84 65080A.021
46 

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; 


rfrederick on DSKD9S0YB1PROD with HEARING
47 

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:] 


rfrederick on DSKD9S0YB1PROD with HEARING
48 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 90 here 65080A.022
49 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 91 here 65080A.023
50 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 92 here 65080A.024
51 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 93 here 65080A.025
52 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 94 here 65080A.026
53 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 95 here 65080A.027
54 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 96 here 65080A.028
55 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
56 

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:] 


rfrederick on DSKD9S0YB1PROD with HEARING
57 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 102 here 65080A.029
58 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 103 here 65080A.030
59 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 104 here 65080A.031
60 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 105 here 65080A.032
61 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 106 here 65080A.033
62 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 107 here 65080A.034
63 

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 obliVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
64 

gations as they’ve been set out. To date, they have never withheld 

that. So we—— 

Mr. SILVERS. I’m asking you a different—and I’m asking both of 

you this question. 

Ms. CIANCI. Okay. 

Mr. SILVERS. How is this measured? You’ve described general 

goals and Treasury hasn’t fired either of your firms. But how is 

your performance measured? What are the metrics that are used, 

either by your senior management within your firm or by Treasury? And what constitutes good? 

Ms. CIANCI. I’ll continue with the thought that, with respect to 

Treasury and our performance, I feel there is a constant feedback 

loop to our expectations and how we’re performing against those. 

There are also numerous third parties that are engaged to review 

our work. For example, the MITRE Corporation, as I noted in my 

opening statement, reviewed our work in the IR2 space for 2009. 

They’re presently reviewing our IR2 work for 2010 fiscal year, as 

well as the homeowner hotline oversight that we provide, our back 

office operations, our CFO team, our Program Management Office. 

They’re looking for efficiencies in the deliverables and the cost efficiency as well. 

Mr. SILVERS. Mr. Heran. 

Mr. HERAN. From our standpoint, Treasury is actively involved 

in measurement at what I will call the lowest common denominator 

to measure our performance. We touch servicers in a number of 

ways. We have many different initiatives that, quote, ‘‘audit’’ the 

servicers. We are measured against meeting the objectives and the 

number of visits each of these different groups do within the organization. We’re managed very closely on that, on virtually a weekly 

basis. 

Mr. SILVERS. My time has expired. I assure you, Mr. Musi, I will 

come back to you in the next round. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

You know, I cannot pick up the paper or go to the Internet on 

a daily basis and I do not find an article about a homeowner who’s 

disgruntled by the entire process of dealing with Fannie and 

Freddie, HAMP, doing a mortgage modification or a refinancing 

under another program. They often say that: I was asked for certain papers, I submitted the papers, the papers were lost; I was 

then asked for different papers. They’re getting a run-around. 

You know, if you read this once or twice you think, well, this is 

some reporter on sort of a slow news day. But when you read it 

on a daily basis, it tells you if there’s smoke there’s probably some 

fire. 

So I’d like your comment on that, and specifically what you can 

say to the homeowners, who may actually listen to some of this, 

what you’re doing about that to streamline the program, to ask for 

what you need the first time, to actually receive it, and then make 

decisions? 

Mr. HERAN. I’ll take the first stab at that, Mr. McWatters. I 

share your concern and I deeply sympathize with every borrower 

that is experiencing those kinds of difficulties with servicers. I in 

fact am more bothered with it, I believe, than most people would 


rfrederick on DSKD9S0YB1PROD with HEARING
65 

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? 


rfrederick on DSKD9S0YB1PROD with HEARING
66 

Mr. HERAN. No, and perhaps I misunderstood the first question. 

I was trying to describe the level of supervision that we receive, as 

opposed to an audit. Those procedures are not independent. But 

the point I’m trying to make is Treasury is actively managing the 

process, which I would think is different and in fact far more severe than whether they had a third party come in and audit the 

process. 

Mr. MCWATTERS. But there is not a third party? 

Mr. HERAN. There is no third party that audits the process. 

Mr. MCWATTERS. Okay. 

Ms. CIANCI. If I could add. I know the light’s blinking, but there 

have also been—Treasury has directed us to perform an outside 

audit through the SAS–70 work to measure our controls. We received an unqualified opinion in that space from Grant Thornton 

with respect to our Program Administrator role. SIGTARP has audited our compliance and ethics performance and, as I described 

earlier, the MITRE Corporation is doing numerous reviews of our 

work as Administrator. 

Mr. MCWATTERS. Thank you. That’s very helpful. 

Mr. SILVERS. Thank you, Mr. McWatters. 

Dr. Troske, you have questions? 

Dr. TROSKE. Thank you. 

Let’s start with you, Ms. Cianci. I’m still trying to struggle a little with exactly what output you’re producing. I’m an economist, so 

I like to see an exact definition of outputs, since I work best with 

that. My understanding is you actually aren’t the ones modifying 

the loans. That’s the servicers. You’re just trying to convince the 

servicers to do so. 

So could you give me a little better—what is it that you are providing, the output that you’re producing for the Federal Government? 

Ms. CIANCI. It’s a very wide scope. 

Dr. TROSKE. Okay. 

Ms. CIANCI. Let me highlight a couple of notes from my written 

testimony that gives a little more detail. We routinely provide advice to Treasury as it creates the policy behind the Program and 

help them produce the Supplemental Directives for the industry. 

We also are responsible for the registration of the servicers, with 

over 110 servicers having signed participation agreements, through 

our HAMP Solution Center. 

We prepare the requisite forms and contracts to get them signed 

up for the Program. We are responsible for implementing a borrower-outreach effort on behalf of Treasury. We are also responsible for implementing an overall marketing plan that targets atrisk borrowers to help them understand the options available and 

where to go to get help. In connection with that, we helped produce 

the borrower web site, multiple materials in various languages, 

and we lead an outreach campaign to troubled borrowers around 

the country. 

We also helped Treasury support a public service advertising 

campaign targeting troubled borrowers. 

Dr. TROSKE. Great. Okay, thank you. 

I was struck by something in your written testimony and your 

spoken testimony as well. You basically say that Fannie is doing 


rfrederick on DSKD9S0YB1PROD with HEARING
67 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
68 

information than, say, a money manager or a law firm might. Can 

you talk about what you might see as the challenges facing your 

counterparts in those types of—for those types of contractors and 

agents for TARP? 

Mr. MUSI. When you have access to material nonpublic information—and let me describe that. That is information that, if known 

to somebody in the public, would allow them to benefit through an 

investment because it could affect the company that they are choosing to invest in and could be market-moving in terms of their stock 

price. 

We, in our role as custodian and our servicing of the TARP contract, really only have material nonpublic information for a very 

short period of time, and that’s when a company requests to participate in TARP, and from that point forward, when we are notified by Treasury of that, to the point where the funds are actually 

disbursed. It’s usually approximately a 2-week period, and that’s 

where we apply all the controls that I described previously. 

The challenge for most companies in dealing with this is how to 

physically separate employees who would have access to the material nonpublic information associated with TARP and their actions 

in other parts of the company, primarily to manage assets for 

themselves or for their clients and, similarly, to make sure that 

their employees don’t benefit from that material nonpublic information and trade on it. 

Mr. SILVERS. Do you—what do you—you’ve been very thorough 

in outlining what you do up front. What do you do on the back end, 

so to speak, to monitor trading accounts, to monitor customer trading accounts, to ensure that this is not actually happening despite 

your best efforts? 

Mr. MUSI. We have 200 employees who have been identified as 

servicing the financial agent agreement, and those 200 employees 

each are required to have their accounts at an approved brokerdealer, who provides us with feeds of any trades that they enact. 

Prior to trying to trade, they have to go to our centralized ethics 

office, which maintains a list of any financial association who is 

part of the TARP program, and if that name is on the list those 

employees are prohibited from trading. 

If, for example, they did trade anyway, at a broker-dealer that 

wasn’t part of our approved network and who doesn’t provide us 

with on-line feeds of trades and trade confirmations, then it would 

obviously be up to the SEC to try and identify that. We actually 

get representations from all of those employees annually that they 

meet our code of conduct, which prohibits them from trading on inside information or sharing confidential information. 

Mr. SILVERS. Do you have any process for liaisoning with the 

NASD and the SEC in terms of this type of back end monitoring? 

Mr. MUSI. If in fact they were concerned about one of our employees for any reason, including being part of the TARP program 

and trading on that information, they would contact us and let us 

know that they were investigating them. 

Mr. SILVERS. But you don’t have a proactive sort of relationship 

with them around this sort of thing? 


rfrederick on DSKD9S0YB1PROD with HEARING
69 

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? 


rfrederick on DSKD9S0YB1PROD with HEARING
70 

Mr. HERAN. Yes, sir. And we do. We reevaluate processes, we reevaluate what they are doing. Some of them come under much closer monitoring. And again, everything that we do, everything that 

we see, is reported to Treasury. 

Mr. MCWATTERS. Can we then expect to see fewer of those reports of mom and pop standing in front of their house, which is 

being foreclosed even though, they say—and again, I don’t know if 

they’re telling the truth or not, but they say—that all the documents were submitted and they did everything they needed to do, 

but changes were made and they’re being foreclosed? 

Mr. HERAN. I assure you that I’m doing everything in my power 

and my group, in enforcing compliance, is doing everything in their 

power to make sure those complaints are minimized. 

Mr. MCWATTERS. I think a lot of the American public would very 

much appreciate that, maybe more than most things these days. 

Ms. Cianci, last month a group of outside analysts discovered 

that some of the data on redefaults published by Fannie was inaccurate. What has been done to fix that? Was that just a one-off 

deal? Is that indicative of something more systemic? 

Ms. CIANCI. We believe it’s absolutely contained to this table that 

was produced. We’re very clearly disappointed in the error we 

made in the redefault table that was published with the June public report by Treasury, which overshadowed the good performance 

of the permanent modifications in this Program. 

But immediately upon discovering it, we notified Treasury and 

we took upon a three-phased remediation approach. The first phase 

was about recoding and validating a revised grid. Treasury engaged the MITRE Corporation to come in and independently code 

and validate the grid. Fannie Mae assigned four independent 

teams to recode and revalidate the grid and the Fannie Mae internal audit team, with the help of a third party consultant, similarly 

oversaw the work. 

MITRE expressed strong confidence to Treasury regarding the 

revised table, and so at the end of phase one the revised table was 

published on August 6. 

In phase two, the internal audit and MITRE Corporation did a 

root cause analysis and helped to identify some recommendations 

that would bolster controls regarding our production of data in support of the public report. 

We’re in phase three right now, which is to implement some of 

those items to bolster our controls in this space. 

Mr. MCWATTERS. So you are addressing it, then? 

Ms. CIANCI. We are indeed. 

Mr. MCWATTERS. Okay. About a year ago, on October 21, 2009, 

there was a report by SIGTARP or SIGTARP noted the significant 

difficulties that Freddie Mac was having meeting its obligations 

and that Treasury had to develop a detailed remediation plan addressing many of Freddie’s contractual obligations, as well as a 

place—as well as place a Treasury official with Freddie Mac fulltime. 

What’s your response to this, Mr. Heran? I mean, is this problem 

that SIGTARP identified—it’s 11 months old now—has it been basically solved? 


rfrederick on DSKD9S0YB1PROD with HEARING
71 

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? 


rfrederick on DSKD9S0YB1PROD with HEARING
72 

Mr. MUSI. We believe we’ve priced it fairly and that the services 

are based on the types of services we render to other institutions 

and the pricing that we would derive from that. 

Dr. TROSKE. What output—what is Treasury looking at when 

they evaluate your performance, what sort of financial—how do 

they monitor your performance? What is it that they tell you 

they’re looking for in terms of what you’re producing for them? 

Mr. MUSI. We produce a very detailed accounting to reflect the 

costs. So each person who is actually supporting the program—it’s 

literally down to the time card level—would then reflect the 

amount of time that they put into it, as well as other fixed costs 

that we have that we know are only associated with the TARP program, and those are the costs that become the basis for the costplus calculation. 

Dr. TROSKE. Again, what are those people that are working for 

the program supposed to be producing? I mean, what output are 

they producing? What is it that you’re producing for Treasury? A 

return on assets, or bills paid promptly on time, or what is it that 

you’re producing? 

Mr. MUSI. Our role in this process is functionally a service provider. We basically make payments in accordance with instructions 

and we take in assets, we custodize those assets, and we pay dividends. So it’s a very ministerial, administrative type of role. All of 

what we’re talking about are the costs associated with that administration. 

Dr. TROSKE. You seem to indicate that your contract has no sort 

of financial incentives, that if you do this very well, you do this 

very well, you get paid additionally. Is there any sort of incentive 

in the contract that would push you to do certain actions? 

Mr. MUSI. I don’t believe that the contract has those terms and 

we are only pushed to serve the requirements that we are committed to serving in the contract, and certainly not to take any 

shortcuts in the interest of shaving costs. 

Dr. TROSKE. Mr. Heran, I want to come back to you about some 

of the issues Mr. McWatters and Mr. Silvers have raised. When 

you find a servicer that’s not in compliance, that is doing things 

that you find disappointing, you’ve said you adjust the process and 

try to improve and streamline the process so it works better. Do 

they suffer any penalties? Is there a point at which they do suffer 

penalties? And what would those penalties be? 

Mr. HERAN. There are remedial actions. Every finding that we 

have goes into a report, depending on the severity of the individual 

observation or finding. It is followed up on. That follow-up can be, 

for the less severe, routine, I think the servicers are given 30 days 

to respond to our findings. We check the validity of those responses. 

Where it’s more severe, for example in the documentation that 

we’re talking about—or even a better example might be the early, 

well publicized problems with the NPV model—there is immediate 

remediation. The servicers—several servicers were directed to 

cease using what’s referred to as their recoded model. That is simply taking the Treasury model and making it more efficient by coding it into the servicer’s own system. Many servicers were told, because of the handling of that recoded model, that they needed to 


rfrederick on DSKD9S0YB1PROD with HEARING
73 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
74 

But I do want to make just a single discrete point about the con- tracts 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 conVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00080 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
75 

tracts is after contracts are awarded the government customer best 

protects its interest when it staffs its contract management function with skilled professionals. The problem that we have in a situation where it’s all about people is over the last 20 years this is 

a situation where the government hasn’t excelled, hasn’t been competent. Frankly, it’s been an unmitigated disaster. The government’s track record on post-award contract management has been 

abysmal. 

Therefore, if I was going to make a single relevant point today, 

it’s that any prospective investment by the Federal Government 

generally or the Treasury Department specifically in upgrading the 

number, the skills, or the morale of their contract purchasing officials or their contract management officials would reap huge dividends for the government and the taxpayers. It’s not going to solve 

the problem overnight, but it’s a responsible investment in the future. 

Thank you for the opportunity to share these thoughts with you. 

I just wanted to have you have one more witness who beat the time 

deadline, and I’m pleased to answer any of your questions. 

[The prepared statement of Professor Schooner follows:] 


rfrederick on DSKD9S0YB1PROD with HEARING
76 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 143 here 65080A.035
77 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 144 here 65080A.036
78 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 145 here 65080A.037
79 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 146 here 65080A.038
80 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 147 here 65080A.039
81 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 148 here 65080A.040
82 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 149 here 65080A.041
83 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 150 here 65080A.042
84 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 151 here 65080A.043
85 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 152 here 65080A.044
86 

Mr. SILVERS. Professor Schooner, I was going to comment that 

this seems to be catching. Very dangerous for us Panel members, 

who have to emulate it. 

Mr. Amey, the floor is yours. 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
87 

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:] 


rfrederick on DSKD9S0YB1PROD with HEARING
88 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 159 here 65080A.045
89 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 160 here 65080A.046
90 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 161 here 65080A.047
91 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 162 here 65080A.048
92 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 163 here 65080A.049
93 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 164 here 65080A.050
94 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 165 here 65080A.051
95 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 166 here 65080A.052
96 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 167 here 65080A.053
97 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 168 here 65080A.054
98 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
99 

So, viewed in this light, the problems of TARP spending that this 

Panel has rightly identified are very much associated with government-wide problems. According to the GAO, the number of contractors that supported TARP administration operations grew from 11 

at the start to 52 by October 2009, a 473 percent increase in 1 

year’s time. 

Since there can be no self-government when the work of government is largely hidden from public view, these trends demand serious attention. How can we ensure best practices in government 

contracting? We can begin by insisting that the existing law be 

upheld. The Federal Funding Accountability and Transparency Act 

of 2006 (FFATA), co-sponsored by then-Senator Barack Obama, 

stipulates that all information on how taxpayer money is spent is 

to be provided on a, quote, ‘‘single searchable website accessible to 

the public, at no cost to access.’’ USAspending.gov is supposed to 

be that website. FFATA also mandated that information on subawards be available to the public by January 1, 2009. That information is still unavailable. 

Without transparency in subcontracts, we are effectively pouring 

taxpayer money into a black hole, and this applies to Iraq and Afghanistan, I think, as well as the TARP. 

I stand ready to be persuaded otherwise, but to date I have found 

most concerns about the costs of transparency to be misplaced, excessively focused on the short-term at the expense of the sustainable. Some say that transparency is too time-consuming and invites 

endless dialogue with the public. Since the latter is precisely what 

self-government requires, the former is not too high a cost to bear. 

Others argue that full disclosure compromises business proprietary principles. But when business is serving government, other 

principles must trump comparative advantage and profit. 

In conclusion, when so much of the work of government is in private hands, standard approaches to transparency will no longer 

suffice. Companies as well as government can operate with the 

purest of intentions, but if their most important transactions are 

opaque to the public they will lose trust and effectiveness. Emergency circumstances may make this more difficult, but no less imperative. The twin values of self-government and fiscal prudence 

depend on it. 

Thank you for your attention and I welcome your questions. 

[The prepared statement of Professor Stanger follows:] 


rfrederick on DSKD9S0YB1PROD with HEARING
100 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 175 here 65080A.055
101 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 176 here 65080A.056
102 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 177 here 65080A.057
103 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 178 here 65080A.058
104 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 179 here 65080A.059
105 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 180 here 65080A.060
106 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 181 here 65080A.061
107 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 182 here 65080A.062
108 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 183 here 65080A.063
109 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
110 

whatever you want in a contract where other interests of the contractor dominate the contract. That’s a unique—maybe not unique, 

but a particular problem to TARP that I think we need help in 

thinking about how to address. 

Mr. SCHOONER. Correct. There are two parts to that. Number one 

is choosing the contractor and then the other is incentivizing the 

behavior you want and disincentivizing the behavior you don’t 

want. If you believe that there are certain conflicts that you either 

want mitigated or avoided, trust me, you can do that with the pricing mechanism. The question is what are you articulating is your 

highest priority. 

Oftentimes—and this is a large problem when the government 

doesn’t have internal capacity—if the best personnel is out in the 

private sector and you don’t control them, you can’t necessarily motivate them to do what you want them to do. So you have to make 

a tradeoff. 

So again, one of the things that we talk about in our testimony: 

You can get complete accountability and you can get complete compliance, possibly at the expense of value for your money. So it’s all 

going to be a tradeoff. But it comes back to the fundamental outsourcing issue, and I don’t want to revisit this too long, but, as Allison points out, I think we all agree, the government has become 

increasingly dependent upon contractors, and I think it was you 

who earlier raised the issue of inherently governmental functions. 

The key thing here is this is not a procurement issue. It may be 

that at the Cabinet level no one wants to talk about it and for the 

purposes of analysis it gets shunted to the Office of Federal Procurement Policy in Office of Management and Budget because no 

one else understands it. But these are absolute fundamental leadership issues that have to be confronted at the highest levels. 

Mr. SILVERS. My time has run. I’m going to ask the other panelists to respond on the next go-round. 

Mr. MCWATTERS. Thank you. 

We’ve all read the testimony from the first two panels, listened 

to it. I’ve read your testimony, and it seems to me I can boil this 

down into four different things. One, I’m concerned about competition or the lack of competition. Two, I’m concerned about accountability. Three, I’m concerned about transparency. And four, I’m 

concerned about conflict of interest. 

As Professor Schooner said a moment ago, you can have perfect 

accountability if you spend a lot of money having perfect accountability. So that’s really not what the goal is here. 

So with these four benchmarks, I would like for each of you to 

reflect to the extent you can and grade Treasury on how Treasury 

has done on competition, accountability, transparency, conflict of 

interest. If you don’t give an A, explain why. Start with you, Mr. 

Amey. 

Mr. AMEY. Okay. On competition, I would say that I’m openended right now, but I would probably say less than an A, if I may 

hedge my bet with either an A or less than an A, due to the fact 

that, although all these contracts—in the first panel you talked 

about how many vehicles there were and how they had selected 

multiple contractors, but the real question is what is the level of 

competition after you have all these preapproved contractors on the 


rfrederick on DSKD9S0YB1PROD with HEARING
111 

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 proVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00117 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
112 

curement regime as developed as ours and most nations would be 

stunned by the quality of the work they’ve done. 

In terms of the Federal Government norm, they are well above 

average and, whether we want to be in the high B’s or the low A’s, 

I think that’s complicated. But all you have to do—let’s keep in 

mind what Allison Stanger just said: This was done in a hurry and 

it was really important and everybody was watching it. Compare 

it to the outcomes with the military contracting in Iraq, the military contracting in the State Department, and the aid contracting 

in Afghanistan, compare it to the post-Katrina disaster contracting, 

A-plus work. 

Third, from an aspirational standpoint there’s always room for 

improvement on a contract by contract basis. We can all sit down 

and do better. Give them a little more time and a lot more staff, 

a little bit of training, and some more best practices, there’s plenty 

of room for improvement. 

Mr. MCWATTERS. Fair enough. That was very helpful. Thanks to 

all three of you. 

Mr. SILVERS. Thank you, Mr. McWatters. 

Dr. Troske. 

Dr. TROSKE. First I’d like to thank all of you for your written testimony. I’m not an expert in this issue and I learned quite a bit 

in reading it. Professor Schooner, I think I understand why you’re 

here, because I thought your analysis of the things to look for and 

the tradeoffs that are inherent in trying to achieve one goal versus 

another were very useful for us to keep in mind. So I do appreciate 

it. Professor Stanger, as a fellow chair of a department, I appreciate your efforts as well to even come here. 

So I do want to—Professor Schooner, so you did—you did say 

that sort of contracting at no profit is not unusual in the Federal 

Government. For me that always raises an issue of, okay, so what 

are they hoping to get at it? I’m not arguing that this is any different than what anybody else is doing. I’m just always concerned 

to try to understand what’s motivating them for performing this 

service, and if it’s not a profit motive then I struggle to sort of— 

what else are they hoping to get out of it. 

So maybe you could help me sort of understand. If they’re not 

working for profit, what are they doing? You hinted at that a little, 

but maybe you could expand on that. 

Mr. SCHOONER. Unfortunately, I think the starting point is that 

you and I are the wrong people to be having this conversation, to 

the extent that we work at not-for-profit institutions and profit 

does not drive the decisions we’ve made. I don’t know your background, but I’m assuming, like mine, you left an opportunity where 

you were making significantly or a lot more money and had the opportunity to do so every day. 

The point that I think I was trying to make earlier is, if we can 

distinguish on the one hand the large community of not-for-profit 

firms, which is staggering in government contracts, everything 

from universities to Federally funded research and development 

centers to think tanks—there’s a lot of sophisticated people with 

mind-bogglingly wonderful talents that are not necessarily worried 

about the marginal dollar and are more interested in participating 

in the single most exciting jobs in the world. 


rfrederick on DSKD9S0YB1PROD with HEARING
113 

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. 


rfrederick on DSKD9S0YB1PROD with HEARING
114 

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 outVerDate Mar 15 2010 06:25 Mar 22, 2011 Jkt 065080 PO 00000 Frm 00120 Fmt 6633 Sfmt 6602 E:\HR\OC\A080.XXX A080

rfrederick on DSKD9S0YB1PROD with HEARING
115 

side involvement, and at that point try to divest them as much as 

possible, but bring them in as a government employee for that 

short time period, and then they can return to the private sector 

in whatever their old capacity was. 

Mr. SILVERS. Professor Stanger. 

Ms. STANGER. I think you ask a great question, and there’s plenty of room for conflict of interest in all these TARP transactions. 

There are rules that are supposed to govern conflicts of interest, 

but they remind me a little bit of international law. You can delineate all these rules and regulations, but the main kicker is who’s 

going to enforce them? To me that’s the central question, and that’s 

why again I keep coming back to transparency, because you can set 

all the rules in place, and they just don’t get followed. That is why 

I am increasingly convinced that getting as much information out 

in the public domain and encouraging self-policing behavior and 

encouraging the American people to hold their government accountable is really the key. 

Mr. SILVERS. In that vein, do you have any comment on our inability to get the Cadwalader firm before us? 

Ms. STANGER. I think that’s inexcusable. Maybe I didn’t hear you 

correctly. Who before you? 

Mr. SILVERS. The Cadwalader firm. I don’t know if you were here 

earlier. 

Ms. STANGER. Yes, I heard that, and they should feel a moral obligation to be here and to provide that information. 

Mr. SILVERS. In their defense, I should note that I don’t see how 

they could appear, given that their client objected, absent a subpoena. I’m not sure that—they may feel that moral obligation, but 

Treasury having barred them, I don’t know they could get here. 

Ms. STANGER. Well, this is why I think we really just have to 

change our whole notion of what acceptable levels of transparency 

are, because so much of the work of government is in private 

hands. Once we realize the transformation that has taken place, 

which I try to outline in my book, then that brings you to the realization that without radical transparency, we’re slowly losing our 

capacity for self-government. 

Mr. SILVERS. My time is up, but Professor Schooner seems to be 

very eager to get in and I’d hate to frustrate him further. 

Mr. SCHOONER. I want to make a brief point and then another 

response. On the Cadwalader issue, if this had been something 

that someone was concerned about in advance, they should have 

put it in the contract. That’s one of the things where if you have 

a problem, a lot of these things can be dealt with proactively. After 

the fact, you can’t fix them. 

But I want to go back to something that Mr. Amey said because 

I think it’s really important. The point that you made about the 

conflicts and the fact that all of the talent may be in the private 

sector in a certain sphere. The solution cannot be federalizing the 

private sector or federalizing the talent pool. I’m not saying you 

suggested that. But it’s a nation founded on private autonomy, and 

Mr. Amey’s suggestion that we’re going to take talented people, derail their careers, put them in Federal service, have them divest 

their holdings for the privilege of being forced into Federal service, 


rfrederick on DSKD9S0YB1PROD with HEARING
116 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
117 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
118 

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, 


rfrederick on DSKD9S0YB1PROD with HEARING
119 

post-award contract management, and all of the little non-perceived value-added duties that don’t contribute to the bottom line. 

That’s where you’re going to have real troubles in the long term. 

Dr. TROSKE. Let me stay with you, Professor Schooner. In your 

opening statement you did sort of point out that I was pushing 

Fannie, Freddie, and BNY Mellon about the form of their contracts 

and the fact that it was cost-plus and didn’t seem to have a lot of 

incentives. Yet, throughout your testimony so far you seem to indicate that putting incentives in those contracts can be quite valuable. As an economist, I 100 percent agree with that. 

But you have also correctly pointed out that incentives can be a 

very dangerous thing, because when you give them an incentive to 

do something they do that, and that may not be exactly what you 

want them to do. So give me a little thought about what ways you 

think those contracts could be restructured to get them to perform 

in ways that we would like them to perform? What incentives do 

you think, or disincentives? 

Mr. SCHOONER. Let me start. Mr. McWatters was concerned with 

one of the providers that people were complaining about the fact 

that they submit forms. So customer satisfaction, I think that’s one 

of the most obvious ones. I put that in my testimony. I have been 

baffled over an entire career in this place how ineffective the government is at assessing customer satisfaction. J.D. Power and its 

competitors exist because the marketplace loves customer satisfaction. We know how to gauge it, we know how to quantify it, we 

know how to reward it and we know how to punish it. 

Once the Federal Government embraces that type of metricsbased approach, Federal Government procurement’s going to be 

much better, and this is no different. 

Dr. TROSKE. Thank you. 

One sort of personal observation, since we talk about employment in the Federal Government. I was actually one of the employees. In a former life I was an employee of the Federal Government, 

the U.S. Census Bureau. And I can tell you that we had contractors 

then as well. You didn’t know who was a contractor and who 

wasn’t. It’s one of the amazing things that the contractors work 

with the other government employees; you often, unless you specifically ask them, are you a contractor or not, you don’t even know. 

Mr. SCHOONER. That’s a modern era phenomenon, though. 

Dr. TROSKE. Yes. 

Mr. SCHOONER. It was not supposed to be that way, and in fact 

the regulations specifically require the opposite. So part of this 

blended workforce and the management of it is the phenomenon 

that you discuss. 

Dr. TROSKE. I guess since I have a couple extra, a minute or so, 

maybe, Professor Stanger, I’ll ask you. The question about financial 

performance—and we pushed a little bit regarding Fannie Mae and 

Freddie Mac. It seems surprising to us that you would contract 

with a firm that had just gone into bankruptcy. Is that something 

that you would think you would generally want to take into account when thinking about contracting with a firm? And this 

blended issue, the comments about, well, we thought that they 

were already in conservatorship and so this was a convenient way 


rfrederick on DSKD9S0YB1PROD with HEARING
120 

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 


rfrederick on DSKD9S0YB1PROD with HEARING
121 

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.] 


rfrederick on DSKD9S0YB1PROD with HEARING