This is in the background. But it’s important.
As we told you last week, the Fed has initiated a program to purchase half a trillion dollars worth of mortgage debt that is purportedly clogging up the credit markets. This is essentially what the TARP program was initially supposed to do — buy back mortgage securities. But they decided not to. And now the Fed is doing something similar, though there are important differences.
They’ve contracted with four financial services firms to manage the money. Under normal circumstances the fees generated by managing that much money could be huge.
Equally important, having these firms manage this money creates huge potential conflicts of interest and opportunities for self-dealing. Just to explain this in the most general terms, the companies holding these securities are sitting on assets worth only a fraction of their presumed value as recently as six months ago. The companies now managing the buy-back are in many cases the same outfits that helped saddle these companies up with these crappy investments in the first place. And they’re the companies likely to be doing business with these companies again once this TARP thing is over. So the managers have all sorts of incentive to make these companies whole as opposed to driving a good bargain for taxpayers.
All of which makes it really important that we know how these four companies were chosen, how they’re being paid and just how the decision-making is taking place.
So with all that in mind, last week, we went to the Fed and started asking questions. A Fed representative insisted that there’d been a formal and open bidding process. He refused to divulge any information about the value of the contracts of the successful bids. But he did tentatively agree to release the original RFP (Request for Proposals). But now they seem to have changed their minds and have stopped returning our calls.
Now, here’s the key. This isn’t some remote issue of good government transparency. This is about gargantuan sums of money used in a way that makes possible all sorts of rotten insider deals. And the Fed won’t release even the most cursory information on how this is being done. That’s a big deal.
I can’t tell which is a bigger scandal — that fact that the Fed is shifting gears and stonewalling us or that we seem to be the only ones even asking the question.
Zack Roth has more at TPMMuckraker.
An earlier version of this post incorrectly stated that the Fed program is the same as the original plan for the TARP program which was designed to buy up toxic mortgage assets.
From TPM reader M.A.:
I work at an investment bank and deal with the TARP money-managers as clients. Though the Fed has apparently been unclear about the selection process, you should know that these money managers are the four biggest players in the fixed income money management industry and particularly in mortgage backed securities. As a taxpayer I feel very comfortable about the pool of portfolio mgmt talent that these guys are bringing to bear on this project. Agreed that transparency needs to be increased as to fee structures though.
Remember that these fund managers are “buy-side” firms … their interests are in a functioning and efficient marketplace for these securities while also retaining and creating value for the investor (the taxpayer in this case). Do not confuse their interests with the “sell-side” investment banks who created and sold these things in the first place, i.e. Merrill Lynch, UBS, Credit Suisse, Morgan Stanley, etc.
