Bailout managers may be buying own securities

WASHINGTON (AP) - The government's plan to make sure private managers of a $700 billion bailout plan are free of conflicts of interest is weak, according to some critics, and allows too much room for abuse.

The Treasury Department is in the process of hiring financial experts to run the giant, taxpayer-financed fund, created by the legislation that President Bush signed on Oct. 3.

The law allows the department to offer contracts that are not governed by federal procurement regulations, but requires it to draw up conflict-of-interest guidelines.

Interim guidelines released last week require applicants to disclose "any actual or potential conflicts of interest" that may come into play. Applicants must submit a plan to show how they will "avoid, mitigate or neutralize" such conflicts.

While Treasury employees will oversee the plan, there does not appear to be anything in the rules that requires the government to make sure the applicants are being truthful.

"It basically says that these companies are responsible for disclosing their own conflicts of interest," said Laura Peterson, a senior policy analyst for Taxpayers for Common Sense, a private watchdog group. "And they are then responsible for coming up with a plan to fix them. Nowhere in there does it say Treasury will also be doing due diligence."

Treasury can waive the conflict-of-interest provision.

Department spokeswoman Jennifer Zuccarelli said the government will do more than simply require the companies to identify potential conflicts. "While we ask the firms to independently identify their conflicts, Treasury then independently identifies potential conflicts ourselves," she said.

House Speaker Nancy Pelosi, D-Calif. said the guidelines drawn up by the department fall short.

"I am very concerned that they fail to meet the tough conflict-of-interest-standard directed by Congress in the legislation," Pelosi said in an Oct. 7 letter to Treasury Secretary Henry Paulson. "Under these guidelines, companies that benefit from the Troubled Assets Relief Program may also be eligible to offer asset management or other contractor services if Treasury personnel approve a mitigation plan."

The second-ranking House Republican, Rep. Roy Blunt of Missouri, said the bailout legislation rushed through Congress provides for much oversight and transparency. "Whatever the secretary does, the American people are going to get a chance to look at it," he said in a television interview Sunday.

Treasury is hiring managers for three basic tasks:

-Management of mortgage securities once the government has purchased them.
-Management of loans.
-A "custodian" for the program to run auctions, handle accounting and attend to other duties.

The job of custodian was to be awarded last Friday, according to the request for proposal, but it appears it will not happen until this coming week.

The custodian will manage the "reverse auctions" of securities, where the government will act as a single buyer and choose among multiple sellers. To get the contract a a custodian must already have at least $500 billion in assets "under custody."

Managers of the securities portfolio must have at least $100 billion in assets under management while the company that handles loans must already be managing at least $25 billion in mortgage loans or show that they can scale up to manage a portfolio of that size.

In addition to the concern over conflicts, Peterson said the government also has a generally poor track record when it comes to hiring private contractors quickly.

"There's been lots of missteps in the past," she said. "Iraq and Katrina are two very recent examples."

Government auditors have issued a number of reports critical of contracting procedures during the Iraq war and in the aftermath of Hurricane Katrina.

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