The Treasury Department has set an extremely short timetable for picking the companies that will help manage its $700 billion bailout program, which analysts say raises the risk the government will overpay.
The department on Monday said financial firms interested in providing asset management and other services must submit bids by 5:00 p.m. EDT Wednesday, with winners announced as early as Friday.
"That is an extremely quick turnaround," said Jack Horan, a government contracting attorney at the McKenna, Long & Aldridge law firm.
Several analysts acknowledged that the breakneck pace is consistent with the urgent nature of the bailout, which is intended to unclog financial markets by taking bad mortgage-related assets off the books of banks and other financial services firms. But they also noted that recent experiences with rushed contracting — in Iraq and in the aftermath of Hurricane Katrina in 2005 — aren't encouraging.
"We can't criticize them for rushing when we're telling them it's an emergency," said Steven Schooner, a law professor at George Washington University, but "there's no question when you rush, the contracts tend to be less well-drafted ... and lead to less disciplined cost control."
Troubles arose in Iraq and after Hurricane Katrina struck the U.S. Gulf Coast in 2005 because contracts were signed without clearly defining how the work should be done, said Alan Chvotkin, executive vice president of the Professional Services Council, a trade group representing government contractors.
"In Iraq they got the who, they got the what, but not the how," he said.
Treasury spokeswoman Brookly McLaughlin said the government is "moving as quickly as we can, but we're also moving in a careful and methodical way."
The Treasury Department plans to hire five to 10 asset management firms who will set up a process to buy up to $700 billion of distressed mortgages and mortgage-related assets from financial firms.
The process will be overseen by two oversight boards, from the administration and Congress, as well as an inspector general.
But the notices Treasury has issued requesting proposals from financial institutions don't fully answer what some analysts say are critical questions, such as how the government will set prices for the assets it buys.
The notices only say that "reverse auctions and other market mechanisms" will likely be used.
"The more vague they are, the less predictable the outcome will be in terms of price, schedule and value for money," Schooner said.
Federal Reserve Chairman Ben Bernanke has said the government won't pay "fire sale" prices for the distressed assets, which would be less likely to achieve the bailout plan's objective of bolstering the financial sector.
Another question is the potential for conflicts of interest for any investment firm that might participate in the program, since they are likely to own the same types of assets the government is purchasing.
The Treasury Department has issued some interim guidelines to address the issue, such as requiring companies to disclose any conflicts they may have in the bidding process and describe how they will "mitigate" them.
Only companies with $100 billion in bonds and other fixed-income assets under management are eligible to apply to be asset managers, the department said, though future contracts will be opened to small businesses. Among those expected to bid are: Legg Mason Inc., Blackrock Inc. and bond manager Pacific Investment Management Co., or PIMCO.
Treasury is using a simpler contracting process than that used by the Defense Department and other agencies to procure large weapons systems.
The department is using its existing authority to retain so-called "financial agents," a process it already uses for companies that handle its bond sales, Chvotkin said.
But the bailout bill also allows Treasury to waive the rules that govern the procurement process in emergency circumstances.
Treasury said it will select one firm by Friday to provide custodial services such as tracking cash and assets for its portfolio. The department will name the asset management firms next week.