By Cliff Montgomery – June 4th, 2009
Billions of U.S. taxpayer dollars are being spent to bail out Wall Street tycoons. Thus it’s perhaps understandable that the feds would hire private asset managers to oversee these complex, massive expenditures.
But many asset managers hired by the Federal Reserve and the Treasury Department have a direct financial tie to the same kind of toxic assets that they are evaluating for the government, says a major independent watchdog group.
The Project On Government Oversight (POGO) on May 19th sent a letter to the congressional panels directing the bailout, informing them of the “the serious potential for conflicts of interest.”
“It’s perfectly understandable that the [U.S.] government is relying on the expertise of these private fund managers to assist with the complex tasks of asset management and valuation,” stated the May letter.
“[But] POGO is concerned,” continued the letter,”…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.”
“These conflicts of interest could have a wide range of consequences,” stated the letter, “including financial losses for the American taxpayer, an unfair competitive advantage for the fund managers,” said POGO, “and the continued erosion of public confidence in the government’s ability to stabilize the financial system.”
For instance, Bloomberg News in March reported that Pacific Investment Management Co. (PIMCO) had advised the federal government on the value of $118 billion in assets guaranteed by the bailout of Bank of America Corporation. These assets included securities backed by commercial and residential loans.
The problem? PIMCO also had been investing in mortgage-backed securities for a number of private clients– as of March 31st of this year, the company’s mortgage-backed securities fund held about $967 million of such bad assets.
Even some congresspeople have acknowledged this apparent conflict. Representative Scott Garrett (R-NJ) aptly described PIMCO’s potential conflict of interest.
“PIMCO and others potentially have two masters to serve: the U.S. taxpayer and their own fiduciary obligations to clients,” Garrett told Bloomberg in March.
The matter became such a political issue that Bank of America decided to decline the PIMCO arrangement. All the same, it reveals the apparent conflicts of interest in the government’s current Wall Street bailout.
The federal government “should be collecting much more information from these asset managers before concluding that taxpayers are adequately protected from conflicts of interest,” stated a May press release from POGO which announced its letter to Congress.
However, “it appears that the Fed and Treasury are mostly relying on the asset managers for self-disclosure,” continued the release.
“POGO believes Congress should be demanding the Fed and Treasury take a more proactive role in protecting the interests of the American taxpayer,” the release added.
The POGO letter was sent to four congressional committees: the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the U.S. Senate Committee on Finance, the U.S. House Committee on Financial Services and the U.S. Joint Economic Committee.
