Emergency Economic Stabilization Act of 2008, TARP plan
Gerald Herbert/AP
Treasury Secretary Henry Paulson

Government Mortgage Bailout Program Delayed by Hiring Snags

October 29, 2008 07:22 AM
by Anne Szustek
The Treasury Department’s difficulty in hiring asset managers to work on the bailout bill has set back the department’s TARP plan to buy up bad bank assets.

TARP Delayed by Treasury Department’s Hiring Troubles

On Oct. 3, when the Treasury Department got Congress’s go-ahead for the $700 billion bailout bill to buy up banks’ toxic mortgage debt, the department said, according to The Wall Street Journal, that it would quickly get to hiring asset managers to vet the trading of the newly taken-over risky securities.

But nearly a month later, the Treasury Department is still in the midst of the hiring process to find money managers for the Troubled Asset Relief Program, or TARP, the Treasury’s fund as authorized by the Emergency Economic Stabilization Act of 2008, the formal name of the $700 billion financial rescue package.

The Treasury could sign on some financiers as early as this week. But already, “the delays have contributed to investor uncertainty about how effective the rescue plan will be,” writes The Wall Street Journal.

The Treasury may need to take on as many as 1,000 new employees to work on basic administration of TARP-related efforts. If the government does not outsource the actual asset management to an outside party, then it will need to take on even more new staff.

“The Treasury Department has incredibly broad authority to outsource much of this work,” said Bob Tobias, the former president of the National Treasury Employees Union and public sector executive programs director at American University told Government Executive.

“The government doesn’t have a great record of outsourcing the kind of effort that’s envisioned by this plan. The failures have been around the inability or unwillingness to staff up inside, to define the expectations and monitor and measure the progress.”

As of yesterday, only three Treasury Department job openings related to the bailout bill were posted to federal hiring Web site “chief counsel, senior counsel for ethics and attorney advisor general,” writes Government Executive. The department has an email address for interested job seekers, The Wall Street Journal reports that the department has received more than 1,000 applicants for TARP positions and several calls from parties looking to bid on a possible asset management outsourcing deal.

Sources close to the negotiation process told the Journal that Pimco, short for German company Allianz SE’s Pacific Investment Management, “will likely be accepted to manage assets for the Treasury,” the paper writes.

Under the Emergency Economic Stabilization Act, the Treasury Department has the power to hire candidates directly, eliminating much of the red tape that often accompanies federal government employment. The TARP program itself is under close scrutiny, however, both from the public and federal agencies directly responsible for its execution. Under the Act, the General Accounting Office is to have staffers working within the Treasury to oversee bailout efforts. Plus, the Treasury is working to ensure that hires have a background investigation to check for possible conflicts of interest.

Among the possible sticking points is how much financiers are to get paid by the federal government—which is to be almost certainly less than the fees they would fetch in the private sector. The federally employed fund managers are likely going to be paid some 0.15 percent to 0.2 percent of assets, “compared with 0.35 percent for managing typical institutional stock assets,” writes the Journal.

Background: The bailout bill

In light of extreme Wall Street volatility in early September, marked most notably by mortgage companies Fannie Mae and Freddie Mac coming under U.S. conservatorship, longstanding investment bank Lehman Brothers’ bankruptcy and injecting flailing insurer AIG with $85 billion in liquidity, Treasury Secretary Henry Paulson unveiled a plan to buy up $700 billion of securities backed by illiquid mortgage debt.

The bailout bill, now known widely as the “financial rescue package,” would give Treasury Secretary Henry Paulson the right to buy up “residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages. A supplement from the Treasury expanded this to encompass “other assets, as deemed necessary to effectively stabilize financial markets.” Should the proposal go through, Paulson will have to report to Congress three months from the date the ruling becomes effective, then every six months from that date forward.

The proposal is meant to inject liquidity into the mortgage markets to ensure that banks have greater access to funds for lending. This means that should consumers need loans, lenders could afford to lend to persons who have anything less than a perfect credit score—and are thus considered to be some sort of risk.

Banks have traditionally relied on securities markets to purchase bundles of mortgages from them, freeing up funds to make further loans.

But with securities markets frozen, banks are unable to resell mortgages, and thus have no money to make further loans.

Most borrowers today, regardless of their financial condition or credit history, are having great difficulty obtaining the financing needed to operate their businesses.

Hours after the House of Representatives voted 263–171 in favor of a revised $700 billion bailout plan, President George W. Bush signed it into law on Oct. 3.

Democrats had assured the public that they would not attempt another House vote until the bill’s passage was secure, and on Friday a backup plan was even prepared, “giving them the option to interrupt the proceedings and debate an increase in unemployment benefits, so that they could round up additional votes,” according to The New York Times.

The 700-plus point market plunge experienced after the House first rejected the bill on Sept. 29 helped encourage lawmakers to give it the green light the second time around. Others also cited some of the Senate’s revisions, such as increasing the federal government’s FDIC bank insurance from $100,000 to $250,000 per account.

Reference: Text of the 2008 bailout bill


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