The Dangers in Outsourcing the Bailout

September 23rd, 2008 by Phil Mattera

A number of leading Democrats and Republicans expressed strong misgivings on Monday about the autocratic plan for bailing out Wall Street that Treasury Secretary Henry Paulson wants to ram through Congress. It remains to be seen whether this is mere posturing or serious opposition.

Critics are focusing on vital issues such as cost and oversight, but a lot less attention is being paid to the mechanics of Paulson’s proposal – specifically, the question of who would carry out the federal government’s purchase of $700 billion in “troubled” securities from banks. As I noted in my post on Sunday, the draft legislation circulated over the weekend includes a provision that seems to allow Treasury to contract out the process. Treasury then put out a fact sheet making it quite clear it intends to use private asset managers to manage and dispose of the assets it acquires, though the document does not specifically allude to the purchasing. Paulson himself referred to the use of “professional asset managers” during an appearance on one of the Sunday morning talk shows.

It amazes me that there is not more outrage over this aspect of the plan. Paulson seems to be leaving open the possibility that the same firms that are being bailed out could be hired to run the bailout. This would mean that institutions receiving a monumental giveaway of taxpayer money could turn around and earn yet more by acting as the government’s brokers. Aside from the unseemliness of this arrangement, this would be an egregious conflict of interest.

The alternative proposal floated by Senator Chris Dodd, which accepts Paulson’s language on contracting out, includes a section on conflict of interest. But rather than stating what the rules should be, the draft leaves it up to the Treasury Secretary to do so. There were reports on Monday night that Treasury would go along with the inclusion of a conflict-of-interest provision.

Paulson’s approach to the Big Bailout, particularly the insistence that there be no punitive measures for the banks, shows he is not the right party to oversee ethical issues. Paulson apparently can’t help himself. He still has the mindset of a man who spent more than 30 years working on Wall Street, at Goldman Sachs. He is a living example of the perils of the reverse revolving door: the appointment of a private-sector figure to a key policymaking position affecting his or her former industry.

The weak conflict-of-interest provisions Paulson is likely to impose would probably not address the inherent contradiction in having for-profit money managers running the bailout program. Even if Treasury chooses managers whose firms are not getting bailed out, there is still the danger that they will use their inside knowledge to benefit their non-governmental clients (and themselves) or will collude with buyers to the detriment of the public.

A Reuters story that ran on Monday reported that a leading contender for a federal money management role is Laurence Fink and his firm BlackRock, which was involved in managing the portfolio of Bear Stearns when that firm was sold to JPMorgan Chase as part of an earlier bailout. Last March, BlackRock, which is 49-percent owned by Merrill Lynch (now part of Bank of America), announced it was forming a venture to “acquire and restructure distressed residential mortgage loans.” Will Paulson see that as a conflict of interest – or more likely as a credential?

Letting financial firms that have profited from the mortgage crisis manage the bailout gives the impression that we are permanently in the grip of Big Money. To Paulson’s way of thinking, that’s not a problem, but it could make a bad plan much worse.

4 Responses to “The Dangers in Outsourcing the Bailout”

  1. Joe Evans says:

    If this bailout is to proceed then the Federal Government should become percentage owners of these firms and they should hire BLACKROCK to manage their accounts. As a client of BLACKROCK (we) our Government can establish guidelines to help eliminate conflict concerns. The one thing I have always heard about Larry Fink is that he is one of the most ethical man in the business and BLACKROCK has a sought after solutions group that manages risk very well.

  2. CounterCorp says:

    Joe Evans makes the classic mistake of trying to differentiate “good” corporations from “bad” corporations — in essence, applying the “bad apple” theory of why people (or companies) do bad things.

    Thus, we can ostensibly trust Blackrock to do the right thing in the Congressional bail-out, because they’re a “good” company — unlike, say, Bear Stearns, Merrill Lynch, Lehman Brothers, AIG, Fannie Mae, Freddie Mac, Washington Mutual, etc, etc, etc.

    Get the picture? It’s not a few apples that have gone bad, but the barrel itself. It’s a system, structural problem, not an instance in which some companies got carried away with greed.

    Only when we look at corporations and the financial system holistically can we begin to make the changes that will prevent this sort of behavior — and the outcomes that result — in the future.

    Relying on Larry Fink’s personal ethics or Blackrock’s reputation for managing risk is precisely what people and other companies did in regard to the corporations that have already failed, and are being bailed out …

    [See Santayana, George]

  3. Nancy Henker says:

    October 03, 2008

    Well, the engraving has now just been completed on the tombstone of the American taxpayer, inked with W.’s palliative benediction.

    I have read the mountain of mismangaement that is 110-HR 1424, and it is NOT good.

    Paulson has been crowned King of the Financial World, and no one can stop him; no, not one.

    The “oversight” is bogus:

    Are we to seek solace in sheeply assurances in prose that all the King’s men will restrain him?? the Knights of the Financial Round table will not vote against their Lord Paulson.

    It is all but assured that those who are being bailed out will run the TARP (read: tar baby) program.

    Woe to all who live below the dark shadows of Wall Street.

  4. Outsourcing is an exceptional way to capitalize in on your core concerns in today’s business world. :d With the ever growing unsuitability of our economy. :o One must come to the conclusion and determine if business process outsourcing is for their business or not. :-?

    What if it was your only option? The banks have been given a financial bailout, however what about the rest of the suffering business economy in general? Literally a year worth of downward upside down stock portfolio’s. Trillions of $$ Dollars were lost and sure not a result of outsourcing.

    I think we need to diversify ourselves and become pioneers of the future together rather than continuing to be adverse!

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