GAO Audit of Federal Reserve No Bid Contracts Fails to Finger Geithner, Baxter, Dimon, Immelt and Friedman in Suspicious BlackRock Contract

Remember the Audit the Fed bill that was supposed to bring the financial system to its knees if Congress dared pass it? Remember the toothless, watered down version that finally made it into Dodd-Frank and at the time was itself controversial?

Pursuant to direction under Dodd-Frank, the Government Accountability Office today released a 266 page report detailing its findings after a review of the numerous emergency programs instituted by the Federal Reserve from 2008 to 2010. Among the many findings was that the bulk of over half billion dollars in service contracts were awarded without bid. While the report is a step in the right direction, its failure to mention the most suspicious contract (about which we know only because of Congressionally subpoenaed email records of the New York Fed), suggests the review was either facile or compromised. In other words, we cannot rely on even the simplest of half measures when it comes to providing Fed accountability.

Here is what the GAO wrote (all bolding and brackets are ours, throughout this post):

Reserve Banks Awarded Largest Contracts Noncompetitvely and Would Benefit From Additional Guidance on Seeking Competition

Although FRBNY awarded contracts both competitively and

noncompetitively for the emergency programs, the highest-value

contracts were awarded noncompetitively due to exigent circumstances.

FRBNY awarded almost two-thirds of its contracts noncompetitively,

which accounted for 79 percent of all vendor compensation (see fig. 4).

Eight of the 10 largest contracts were awarded noncompetitively. The

largest noncompetitive contract was valued at more than $108.4 million,

while the largest competitive contract was valued at $26.6 million.

Click image to enlarge.

Explaining the process by which FRBNY awarded contracts:

FRBNY awarded contracts in accordance with its acquisition policy, which

applied to all services associated with the emergency programs and

single-institution assistance. FRBNY is a private corporation created by

statute and is not subject to the FAR. Instead, FRBNY developed its own

acquisition policy, called Operating Bulletin 10.

Operating Bulletin 10 states that business areas may use noncompetitive

processes in special circumstances, such as when a service is available

from only one vendor or in exigent circumstances. FRBNY cited exigent

circumstances for the majority of the noncompetitive contract awards.78

Footnote 78 reads:

78 Of the noncompetitive contracts we reviewed, FRBNY awarded only three under the sole-source exception, when a service was available from only one vendor.

This fact will be key later on. Delving into the GAO's findings:

A guiding principle of the FAR, which applies to all executive agencies,

not to the Reserve Banks, is to ensure that agencies are able to deliver

the best value product or service in a timely manner while fulfilling

agencies’ policy objectives. Similarly, Operating Bulletin 10 provides a

framework for acquiring goods and services at the most favorable terms.

However, while the FAR requires certain activities for noncompetitive

awards and identifies specific steps to take, Operating Bulletin 10 does

not. Without similar guidance, FRBNY could be missing opportunities to enhance competition and provide the best value service in

noncompetitive awards. Examples of activities required or restricted by

the FAR include the following:

Soliciting multiple bids. The FAR requires contracting officers to solicit

as many offers as is practicable in the absence of full and open

competition.79 FRBNY officials stated that in noncompetitive

circumstances business areas are encouraged to collect a reasonable

number of competitive quotations and noted that, in at least some

cases, staff members contacted multiple vendors before awarding

contracts noncompetitively. However, FRBNY did not contact multiple

vendors before awarding some of the largest noncompetitive

emergency program and assistance contracts.80

Restrictions on contract duration and scope. Operating Bulletin 10

does not place any limits or restrictions on the duration of a

noncompetitive contract, nor does it require subsequent competition.

In contrast, the FAR generally limits the duration of contracts awarded

under “exigent circumstances” to the time necessary to meet the

unusual and compelling requirements and award a new contract using

competitive procedures, and such contracts may generally not exceed

1 year.81 FRBNY’s longest and most expensive contracts were

awarded noncompetitively and lasted more than 2 years and, in some

cases, could potentially last as long as 10 years.82 Some of these

contracts included distinct services that, while related, were needed at

different times and with different degrees of urgency. FRBNY officials

said that in some cases they think there would be limited benefits to

opening noncompetitive contracts to competition. FRBNY held

subsequent competitions for competitively awarded Agency MBS

program and TALF contracts when the terms of the programs

changed.

Justifying noncompetitive procedures. Operating Bulletin 10 requires

business areas to draft a memorandum that includes sufficient

documentation to justify the noncompetitive acquisition. However,

Operating Bulletin 10 does not provide guidance on what information

should be included in the memorandum. FRBNY justification

memoranda typically included background information on the

emergency program, vendor scope of work, vendor selection factors,

and an explanation of the special circumstances necessitating

noncompetitive awards. The memoranda did not typically identify

efforts made to promote competition, which the FAR requires.

Regarding Vendor Selection Criteria, the GAO makes a curious statement in the next paragraph:

FRBNY considered a number of factors when selecting vendors for both

competitive and noncompetitive contract awards, including a vendor’s

knowledge and expertise and ability to meet program requirements.

FRBNY also considered a vendor’s previous working relationship with

FRBNY or program participants as part of the selection criteria for

competitively and noncompetitively awarded contracts. FRBNY selected

vendors that had previous working relationships with FRBNY and the

program recipients so that it could leverage that familiarity to shorten the

vendor’s learning curve or ramp-up time. For example, FRBNY

noncompetitively selected BlackRock as the investment manager for

Maiden Lanes II and III because BlackRock had already evaluated the

underlying assets pursuant to an engagement with AIG prior to the

extension of credit by FRBNY.

These would constitute two of the three sole-source contracts mentioned in footnote 78, above. The appendixes disclose that BlackRock earned $24.1 million and $50.0 million for serving as the investment manager of Maiden Lane II and III, respectively.

BlackRock was also the investment manager for the original Maiden Lane portfolio that took on the toxic Bear Stearns assets. For serving as investment manager, it was paid $107.6 million in fees.

Recall that there are two bases upon which a no-bid contracts would be awarded: exigency or sole source, whereby there are no practical alternatives to a single service provider. The GAO report does not say on what basis the BlackRock Maiden Lane no-bid contract was awarded, but given the roughly three month window between the mid-March announcement of the new facility and the commencement of management by BlackRock in late June, it would be difficult to claim exigency. Also note the contract was not dated until September 9, 2008, several months later.

Thanks to the aforementioned subpoenaed emails of the NY Fed, we do in fact know that the BlackRock Maiden was sole-sourced. As we wrote in January, 2011:

[W]e'd like to know why BlackRock management of Maiden Lane I was sole sourced without a "clear reason", as is implied by the below email to FRBNY [then] Senior VP, Sarah Dahlgren, which we excerpt from the below document presented to Congress, with emphasis and brackets ours:

To Sarah Dahlgren/NY/FRS@FRS

Re: Sole Source

Spent some time with him [Tom Baxter, Jr., FRBNY GC] tonight. (He doesn't understand ML3, and I can't begin explain it either -- so don't needle him! -- and I am going to have [Paul] Whynott [FRBNY VP] spend some time with him tomorrow, BTW, you might touch base with Joyce [Hansen, FRBNY Deputy GC] about her reaction to Sunday's briefing; I think she had some concerns about how ML3 was presented to Geithner, which she expressed to Paul.) [Geithner] knew that Stephanie [Heller?, FRBNY Asst. GC] was handling the Blackrock contract -- he didn't express any concerns -- and I explained that, in contrast to MLI, we had a clear reason to sole source it this time (that they had already modeled, etc.). So, although I have no worries, yes, probably worth reviewing it with him [Geithner] before taking it to Tom."

It appears there was quite some consternation at the highest levels at the NY Fed about this contract award, yet no mention in the GAO report.

In follow up posts, we will document the full email chain from which the above was excerpted, explore just exactly how the NY Fed's Acquisition Policy (Operating Bulletin Number 10) implicates some of the country's top bankers in this no-bid contract scandal, discuss the GAO's findings of failure in conflicts of interest disclosure, and the GAO's own failure to follow its Congressional mandate under Dodd-Frank.