An audit report on the Legacy Securities Public-Private Investment Program shows the Treasury Department's selection criteria favored larger money managers to handle troubled assets from banks and created “confusion and uncertainty” that dissuaded smaller managers with experience in managing toxic debt from applying.
However, the results of the audit requested in October 2009 by Sen. Claire McCaskill, D-Mo., chairman of the Senate Subcommittee on Contracting Oversight, and panel member Sen. Bob Bennett, R-Utah, won't likely create major changes in Treasury's contracting system.
“I can tell you that the subcommittee was satisfied that the report answered the questions they had asked the IG (inspector general) to look into and will be looking to see if these lessons are applied moving forward,” said Laura Myron, a spokes-woman for the subcommittee.
Timothy Massad, acting assistant Treasury secretary for financial stability, wrote in a response letter to the audit that “we strongly disagree with a number of statements and your conclusions regarding certain details of the fund manager selection process that you believe were not sufficient.”
The audit, released this fall by Neil Barofsky, special inspector general of the Troubled Asset Relief Program, says the confusion about the program began in April 2009 when the Treasury Department said it would use a “holistic approach” to hiring managers and failure to meet one of the specific PPIP selection criteria would not necessarily disqualify an applicant.
The criteria included the ability to raise at least $500 million in private capital and that the managers have $10 billion in residential and commercial mortgage-backed securities — but some of the firms selected for the program failed to meet either or both criteria.
The audit said such confusion led to the following:
• Treasury did not disclose that it would hire only managers that were managing at least $1 billion in total assets. Mr. Barofsky found that 40% of the 141 applicants were disqualified by that rule alone. The report says the unpublished requirement, “impaired the transparency of the (selection) process.”
• Six of the nine managers selected by Treasury failed to meet the $10 billion MBS requirement.
• Nine applicants were deemed by Treasury to have met the $500 million fundraising requirement even though they provided no information to Treasury in their applications that they could raise the funds.
• Treasury waived the fundraising threshold for two of the managers it ultimately selected to be in the program, Oaktree Capital Management LP and Marathon Asset Management LP, saying the companies' inability to raise $500 million was not indicative of their investment capabilities and that both had backgrounds in managing distressed assets.
• Applicants were encouraged to form partnerships with small, veteran-, minority- and woman-owned private asset managers, but Treasury “provided no guidance to the nature or extent of the expected role of a minority partner,” the audit report says.