On Sept. 22, the Congressional Oversight Panel (COP), the body tasked by Congress to oversee implementation of the Troubled Asset Relief Program (TARP), examined the Department of the Treasury’s use of private contractors under the program. Witnesses from government, the private sector, and the nonprofit world critiqued Treasury’s use of financial services contractors and highlighted lessons about improved competition and openness that the government should take from the soon-to-be-ended program.

Shortly after passage of the Emergency Economic Stabilization Act of 2008 (EESA), which created TARP, Treasury began turning to private entities, including investment management firms, law firms, accounting firms, and consulting firms, to assist with implementation of the $700 billion bank bailout. As of the end of August, Treasury had entered into 108 transactions to procure nearly $450 million worth of services.

Under TARP, Treasury entered into two forms of agreements, one with contractors and one with financial agents. Treasury utilizes contractors for basic services like document management, legal support, and information technology, while financial agents act for and on behalf of the government and may hold and manage money. While financial agents have a fiduciary obligation to the government, as deputy chair of the panel Damon Silvers pointed out, they "do not take an oath of office ... stand for election ... nor are they subject to civil service rules." Rather, "Their goal is to turn a profit – not to advance the public good."

Under EESA, Congress granted Treasury emergency contracting authority, which allowed the agency to bypass normal contracting rules under the Federal Acquisition Regulation (FAR), including those concerning competition and conflict of interest. Despite Treasury's steps to mitigate these issues – including issuing separate guidance on increasing competition in TARP contracts and conflict of interest regulations – questions remain.

Despite contractors and financial agents instituting required conflict of interest controls, including internal information firewalls, non-disclosure agreements, and restrictions on gifts and entertainment from outside groups, good government organizations worry that the rules rely too heavily on self reporting. Codes of conduct, incident reporting, and quarterly certifications on ethical issues such as conflicts of interest will likely not capture those employees or organizations that seek to skirt the rules.

According to Scott Amey, general counsel for the Project on Government Oversight (POGO), TARP's conflict of interest rule, instituted in January 2009, is in dire need of additional reforms. POGO and others have criticized the rule "for being cumbersome, ambiguous, inconsistent with the FAR, and requiring clarification." Clarification and improvements would end the "overreliance on retained entities to report organizational and personal conflicts" and "require constant agency monitoring and review."

Amey also pointed out the deficiency of Treasury's general contracting practices and the lessons the government should learn from it. In procuring nearly $4.8 billion in goods and services in Fiscal Year 2009, Treasury opened only 22 percent of those funds to full and open competition. All forms of restricted competition, including competitions within a selected pool of contractors and offers on which the government only received a single bid, account for only roughly 60 percent of Treasury's contract dollars. This means, as Amey aptly points out, that competition for a contract, even in a limited form, is really the exception to the rule at Treasury.

Amey and other witnesses, however, were impressed with the trend within Treasury to convert risky, potentially more costly contract types into more accountable contracts. Indeed, even though the agency entered into a number of time and materials contracts, Amey recognized that Treasury "has made progress in converting them to fixed price contracts when requirements were established and fixed prices could be determined."

Because many of the contracts the government entered into under TARP already exist, there is little the government can do fix these current problems. As Professor Steven Schooner, a George Washington University Law School professor, stated:

Ultimately, Treasury – with its eyes open, and for good reason – entered into a large number of risky transactions, under severe time pressure. At this point, the moment had passed for the government to best employ the lion’s share of the best practices to minimize and avoid risk. Many of those transactions will turn out fine. Some will not.

This is to say that the government should take the lessons from TARP contracting and apply them in the future should a similar crisis arise.

Look for the Congressional Oversight Panel to release a report soon on the Treasury Department’s use of private contractors and financial agents in TARP programs utilizing the testimony from this recent hearing.