Treasury Toxic Asset Program Rife With Conflicts Of Interest

The hiring of private firms to provide "independent" advice to both the Treasury Department and the Federal Reserve raises concerns about potential conflicts of interest, according to a letter written by the Project on Governmental Oversight (POGO) and delivered to key members of Congress.

It seems that some of those firms will be highly familiar with the assets in question.

According to POGO's letter, the Federal Reserve Board has contracted with four firms to manage its $1.25 trillion program that purchases mortgage-backed securities. One of those firms also works with the New York Fed to manage three companies it set up to absorb toxic assets, known as Maiden Lane, Maiden Lane II and Maiden Lane III.

The four firms are Pacific Investment Management Co. (PIMCO), BlackRock, Inc., Goldman Sachs Asset Management, and Wellington Management Company, LLP.

In addition, the Treasury Department is expected to approve five private firms to manage what it is calling its "Legacy Securities Program." PIMCO and BlackRock are also on that list.

Legacy appears to be the new term for "toxic."

"It's perfectly understandable that the government is relying on the expertise of these private fund managers to assist with the complex tasks of asset management and valuation," wrote Danielle Brian, director of the independent nonprofit, which investigates government misconduct. "POGO is concerned, however, about the conflicts of interest that could arise if these fund managers are also investing in the same types of assets for their private clients."

A spokeswoman for the Treasury Department declined to comment.

POGO's letter cited a Bloomberg story from early March that highlighted potential conflicts of interest that could arise with this sort of arrangement.

"Citing two people with knowledge of the arrangement, Bloomberg News recently reported that PIMCO had been advising the federal government on the value of $118 billion in assets --including securities backed by residential and commercial loans -- that were guaranteed in the bailout of Bank of America Corp. But PIMCO had also been investing in these same types of mortgage-backed securities for a wide range of private clients," the letter notes.

As of March 31, according to PIMCO's own disclosures, it was holding nearly a billion dollars in its mortgage-backed securities fund.