making local government more ethical

Bailout Conflicts - The Treasury Speaks Softly and Carries a Small Stick

Update: Later in the day, according to a report in On the Hill, House Speaker Nancy Pelosi called on the Treasury Secretary to strengthen the conflict of interest requirements discussed below.

The bailout, pursuant to the Emergency Economic Stabilization Act of 2008, is being contracted out to financial professionals, who will almost definitely have been deeply involved with the instruments they will be purchasing on behalf of the government. This opens the door to serious conflict of interest problems. They are the same as when a city hires a professional to deal with developments, for example, only on a more massive scale.

The Treasury Department has quickly put out interim conflict of interest rules, which place the burden on bidders to come up with their own conflict mitigation plans. But it seems to me that the interim rules are unnecessarily weak and vague. They are what-not-to-do guide for local governments dealing with contractors' conflicts. Here are the interim rules:

  • Where appropriate, Treasury may obtain non-disclosure agreements and COI agreements in advance of supplying an offeror a solicitation.
  • The solicitation should instruct prospective offerors that they must disclose any actual or potential COIs (including those associated with an affiliate, consultant, or subcontractor) which could arise from performance of the contract. The solicitation will indicate that, if actual or potential COIs are identified, the prospective offeror must submit a mitigation plan as part of its initial proposal. In some situations, Treasury may also desire to include provisions requiring that the prospective offeror identify personal COIs among employees who would be performing the work, and include measures in its mitigation plan for addressing such personal COIs.
  • The solicitation should include an evaluation factor or criteria whereby Treasury will assess the likely effectiveness of the proposed COI mitigation plan.
  • The solicitation will identify any minimum requirements or standards for the COI mitigation plan. For example, if Treasury requires that the mitigation plan will address certain specific issues, offerors should be so advised in the solicitation.
  • If the contractor will owe a fiduciary duty to Treasury in performing the contract, the solicitation should include a statement to that effect. This provision will become part of the resulting contract.
  • The solicitation should include non-disclosure provisions which, at a minimum, apply to the prime contractor. In some situations, Treasury may also desire to include provisions requiring that the prime contractor obtain comparable non-disclosure and/or COI agreements from subcontractors or individual employees.
  • The solicitation should state that Treasury will oversee and enforce the proposed mitigation plan as part of the contract.
  • The Treasury Senior Procurement Executive will review and approve all provisions related to COIs prior to issuance of the solicitation.
  • The solicitation should require that mitigation plans be submitted with offerors' initial proposals. Treasury's evaluators, source selection personnel, and legal counsel will examine the proposed mitigation plans to determine the extent to which those plans provide sufficient protection against actual or potential COIs.
  • The severity of a COI is necessarily dependent upon the circumstances of the case and the nature of the contractual action. Treasury personnel should not assume that a mitigation plan which is acceptable under one situation would also be acceptable under different circumstances.
  • The contracting officer may negotiate the mitigation plan with the offeror, taking into account the type of procurement being conducted.
  • Notwithstanding the submission of a mitigation plan, it is possible that contractor COIs may exist which cannot be effectively neutralized or mitigated. An offeror with an unacceptable mitigation plan will not be eligible for award unless conflicts are waived by the agency head or designee.
  • It is possible that a COI may be waived by the agency head or a designee. Any request for such a waiver should first be coordinated with the Treasury Senior Procurement Executive.
  • Upon award of the contract, the successful offeror's mitigation plan will be formally incorporated into the contract, making the mitigation plan a contractually binding obligation.
Questions that arise from these interim rules are:  Why wouldn't the contractor owe a fiduciary duty to the Treasury, in fact, to the public? Why shouldn't everyone involved have to sign non-disclosure statements? Why should bidders have to come up with mitigation plans overnight (the contractors will be determined on Friday)? How could this be enough time to come up with anything solid, and how could this be enough time for the Treasury to determine, in each case, whether a mitigation plan is acceptable? Why not impose one mitigation plan on all bidders? It would seem the federal government, with excellent ethics experts, could come up with a good mitigation plan more quickly than financial experts.

When it comes to conflicts that "cannot be effectively neutralized or mitigated," which will likely include a lot, the interim rules fail to follow up. All they say is that an unacceptable mitigation plan will lead to rejection of a bid "unless conflicts are waived by the agency head or designee." So the really troublesome conflicts can just be waived, since they can't be mitigated?

This is an extremely difficult problem with an extremely short time frame, but it does not seem to me that the Treasury Dept. is handling it responsibly. There are too many outs, too much discretion for Treasury officials, and almost no solid requirements. I'm not convinced that whoever operates the bailout will not look like they are helping themselves and their business associates, whether or not they actually are.

Robert Wechsler
Director of Research, City Ethics