A key finding from the GAO report related to the noncompetitive award of contracts to third parties, particularly by the New York Fed:
The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency lending activities. A few contracts accounted for most of the spending on vendor services. The Reserve Banks relied more on vendors more extensively for programs that provided assistance to single institutions than for broad-based programs. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively due to exigent circumstances as permitted under FRBNY’s acquisition policies.
The report also stated there was a total of three sole-source contracts awarded, and the GAO went out of its way to highlight the reason for two of them:
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.
Yet, amazingly (or not so), the GAO failed to disclose that BlackRock had no similar experience with the Bear Stearns portfolio (the original Maiden Lane). According to [now] Vice President Sarah Dahlgren of the New York Fed, there was no "clear reason" for BlackRock to be awarded the management rights on a noncompetitive basis. We know this because of internal emails, which were subpoenaed by Congress pursuant to its investigation of the Fed's bailout of AIG:
To Sarah Dahlgren/NY/FRS@FRSRe: Sole SourceSpent 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."
As to the New York Fed's guidelines on third party contracts, the GAO notes:
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.
According to the New York Fed's Operating Bulletin 10, sole-source contracts require approval at the highest levels (emphasis ours):
4.3 Exceptions to Competitive AcquisitionsA. Procedures other than competitive solicitations or small purchase procedures may be used in the following circumstances. The Contract Representative should draft a memorandum with sufficient supporting documentation to justify the use of the exception to acquisition procedures, and obtain the approval of a senior officer (Vice President or higher). The approving senior officer must have the appropriate level of signing authority, pursuant to Operating Bulletin No. 2, for the expected dollar expenditure. A copy of both the approval memorandum and senior officer approval should be placed in the acquisition file of the Contract Representative area and forwarded to the Procurement Division as the central repository for contract information. Contracts in excess of $500,000 that are not competitively bid must be approved by the Bank’s Board of Directors pursuant to Operating Bulletin No. 2.1. Sole Source. The property or services are available from only one responsible supplier and no other type of property or services will satisfy the Bank’s needs.Commentary(1) A sole-source acquisition involves no competition and should be utilized only when justified and necessary to serve Bank needs. A sole-source award should generally be made only where no other source of supply is available.
In short, the approval of the $108 million BlackRock contract had to be approved by both a senior officer at the New York Fed and its Board of Directors due to the size of the contract. And just who comprised the board at the time?
STEPHEN FRIEDMAN, Chair and Federal Reserve AgentChairmanStone Point Capital, LLC, Greenwich, Conn.DENIS M. HUGHES, Deputy ChairPresidentNew York State AFL-CIO, New York, N.Y.JAMES DIMONChairman and Chief Executive OfficerJPMorgan Chase & Co., New York, N.Y.JEFFREY R. IMMELTChairman and Chief Executive OfficerGeneral Electric Company, Fairfield, Conn.CHARLES V. WAITPresident, Chief Executive Officer, and ChairmanThe Adirondack Trust Company, Saratoga Springs, N.Y.RICHARD L. CARRIÓNChairman, President, and Chief Executive OfficerPopular, Inc., San Juan, P.R.INDRA K. NOOYIChairman and Chief Executive OfficerPepsiCo, Inc., Purchase, N.Y.VACANCY 2010 BLEE C. BOLLINGERPresidentColumbia University, New York, N.Y.
Notably, ex-Goldman Sachs Chairman, Stephen Friedman, would later resign in disgrace after it was learned that he was loading up on shares of his former employer (Goldman) as it was receiving overt and covert bailouts from the very same New York Fed through the various emergency lending facilities.
And while the contract amount of $108 million might seem like peanuts in light of the billions being thrown around at the time, BlackRock might have served another function by becoming investment manager for Maiden Lane. As we wrote in June, 2010, BlackRock ended up heavily trading the MBS portion of ML, which had been sold to the public as a vehicle to simply unwind Bear Stearn's toxic assets. So much so, that MBS trading profits papered over the substantial losses in the RMBS and loan sections of the portfolio. While the New York Fed had loaned ML approximately $28.8 billion to purchase the portfolio, JP Morgan ponied up a cool $1.1 billion of its own, and was last in line to be paid if there were losses.
Also, BlackRock was also one of the managers of the NY Fed's separate $1.25 trillion MBS purchase program as part of QE1. Contrary to the lie on the NY Fed's webpage (that the MBS auctions were conducted via competitive bidding), the NY Fed's own purchasing manager, Brian Sack, admitted in a paper that, "the MBS purchases were arranged with primary dealer counterparties directly, [and] there was no auction mechanism to provide a measure of market supply."
Putting it all together, it looks like Jamie Dimon signed off on hiring BlackRock for no justifiable reason to trade the very Maiden Lane portfolio that could have caused his bank, JP Morgan, to lose up to $1.1 billion. And, it was entirely possible that BlackRock saved the portfolio by trading the MBS portion of ML with the New York Fed directly as QE1 was underway.
Unfortunately, the GAO's work product is not subject to public request, but it can be compelled to be released by Congress. The next time Congress decides to subpoena the Fed, or Bloomberg decides to file a FOIA, they might request the acquisition file for the BlackRock Maiden Lane contract containing the officer approval and justification notes, as well as the minutes of the director meeting with Friedman, Dimon, Immelt et al.
If one guy with nothing more than a laptop and an internet connection could find all this, we are left to wonder what other elephants the GAO ignored during its field trip to 33 Liberty Street.
Bob, you rock. Thanks for your work!
ReplyDeleteWow. The plot just gets thicker.
ReplyDeleteExcellent article and research. Thanks. The conflicts of interest have grown to obscene proportions.
ReplyDeleteWhere is the "Regular Statement and Account" required by Article I of the US Constitution?
Blow by blow..they go.
ReplyDeleteThank you for your excellent research shedding new light on those rats.
And I was just about to start reading a post on another blog about the juicy Bloomberg FIOA success.
ReplyDeleteExcellent research indeed, RW. You're a thorn in the side of the Fed.
The late Mark Pittman of Bloomberg indeed deserves much kudos.
ReplyDeleteThanks for all the support here. I'm just getting warmed up.
Wow this is good stuff. The shout out to Mark Pittman made me tear up.
ReplyDeleteI'd like to know what the character (and source) of the MBSs that the FED holds on it's balance sheet as collateral for Federal Reserve Notes really is. There's a research project for ya. Would that be subject to FOIA?
@indio007, FRBNY actually posts an Excel book every week containing the CUSIP of every MBS held in the Fed's SOMA. All are issued by one of the GSEs, with Freddie and Fannie accounting for the bulk. When it first began doing this, I started tracking the changes from week to week, but after a few weeks of 20k+ entries per sheet, it was too much for poor Excel. FRBNY also releases its quarterly holdings (by CUSIP) of ML. When it first started doing this as of Jan 31, 2010 (why not Dec 31, 2009, Fed?), I did a cross check with the SOMA holdings and did not find many common holdings. However, BlackRock had already been trading ML for about 18 months prior to this first disclosure.
ReplyDeleteThere might be some aggregate statistics as to FRBNY's counterparties with respect to MBS total purchase amounts, but someday we do indeed need transaction by transaction detail, including actual PRICES PAID. Then we would see how much graft there was going to the PDs. Given the lower liquidity of MBS securities, I would bet billions were made on the spreads alone.
Interestingly, I had a chance to talk with Pittman about a month prior to his death. He was interested in the MBS program and granular data that had just started to be released each week. I said it would be interesting to look at the loan portfolio composition of some of the larger issues. He had said he was going to have a staffer look into it, but I never heard anything after that.
How do you feel about the Fed's participation in the BoNY Mellon v BAC proposed settlement deal? (Pending Article 77 before Justice Kapnick, NYSCt) If the losses are foisted on Maiden Lane, that's money that doesn't go back to the Treasury even though Dimon and Co. get their bonuses...
ReplyDelete@osc: Most of the $80 billion in funding for ML I-III came from FRBNY, with AIG putting up $6 billion for ML II and III and JPM $1 billion for ML. You're right that if FRBNY takes capital losses on the MLs, those are lost dollars that would have been remitted to Treasury as Interest on FR Notes. AIG and JPM would likely have to write off their loans to the MLs, but Dimon personally would likely not suffer as a result. How do I feel about the outcome of the NYSC case? I really don't care. There's so much intervention at every level, the losses will be socialized somehow. If BAC goes down, it will be a sweetheart deal to another TBTF. Otherwise, it just gets bailed out again.
ReplyDelete