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Wall Street Aid Needed To CarryOut Bailout

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By MARK LANDLER and EDMUND L. ANDREWS

The New York Times

Published: October 4, 2008

WASHINGTON - It will be one of the world's largest asset management firms with an impressive $700 billion war chest. Nothing less than the global economy depends on its success. And the Treasury Department has barely a month to get it up and running.

The bailout bill that President Bush quickly signed into law on Friday must do what financial experts have been unable to do for the past year: Put a dollar value on mortgage-related assets that no one wants, move them off the books of ailing banks and unlock the frozen credit markets.

In signing the measure, Bush warned Americans not to expect instant results. "This will be done as expeditiously as possible, but it cannot be accomplished overnight. We'll take the time necessary to design an effective program that achieves its objectives - and does not waste taxpayer dollars."

Even after working feverishly over the past two weeks, the Treasury will not buy its first distressed asset from a bank for roughly six weeks, and almost certainly not until after the Nov. 4 elections.

Treasury officials do not plan to manage the mortgage assets on their own. Instead, they will outsource nearly all of the work to professionals, who will oversee huge portfolios of bonds and other securities for a management fee.

The Treasury is expected to name a senior official to supervise the program. For now, various working groups creating the program are reporting directly to Henry Paulson, the Treasury secretary.

Paulson has recruited several former colleagues from Goldman Sachs to advise him, although administration officials took pains to say that they were not dominating the process, pointing to other Treasury employees who were playing major roles.

"We will move rapidly to implement the new authorities, but we will also move methodically," Paulson said in a statement after the House passed the bill on Friday.

The government will hire only a bare-bones internal staff of about two dozen people with expertise in asset management, accounting and legal issues, according to administration officials, and will outsource the bulk of the program to five to 10 asset management firms.

Administration officials said they had not yet selected the list of firms to run auctions or manage the assets. During the past few weeks, the Treasury has informally consulted major firms - including BlackRock, the Pacific Investment Management Co. and Legg Mason - but none has been given a mandate, they said.

The selected asset management firms will receive a chunk of the $250 billion that Congress is allowing the Treasury to spend in the first phase of the bailout. Those firms will receive fees that are likely to be lower than the industry standard of 1 percent of assets, or $1 for every $100 under management.

Administration officials said they would try to drive down fees with a competitive bidding process, but with $700 billion to disburse, the plan could still generate tens of billions of dollars in fees if the firms negotiate anywhere close to their standard fees.

The main mechanism for buying these assets will be reverse auctions, using the same principles that govern auctions of electricity or the wireless spectrum. In this case, the government will issue an offer to buy a class of assets - for example, subprime mortgage-backed securities - with the final price being determined by how many banks are willing to sell.

Using outside contractors on such an extensive scale raises a host of thorny questions, outside experts said. Among the most pressing: How will the Treasury avoid conflicts of interest that fund managers will encounter as they work both for their own clients' interests, which could pay higher fees, and the interests of taxpayers?

"With anyone short of the stature and honesty of a Paul Volcker running it, you need to worry a lot about conflicts of interest," said Alan S. Blinder, a former vice chairman of the Federal Reserve, referring to its former head. "Unfortunately, there just aren't many people with the expertise you need but without any possible conflicts."

The Treasury officials said they were still writing a conflict-of-interest policy and guidelines on compensation.

As if the mechanics were not daunting enough, Treasury officials need to make wrenching decisions that will determine the bailout's winners and losers. With so much money on the line, lobbyists for interest groups are already besieging the government to decide in their favor.

The prospect of pitching in during a national crisis drew unsolicited offers from prominent asset managers, such as William H. Gross, the managing director of Pimco, who offered his services for free.

In setting up the program, Paulson has relied on a cadre of former Goldman Sachs executives: Edward C. Forst, a former co-head of Goldman's investment management business who is on leave from his job as executive vice president at Harvard; Kendrick Wilson, formerly chairman of Goldman's financial institutions groups; and Dan Jester, who was deputy chief financial officer at Goldman.

Administration officials said several other Treasury officials were playing crucial roles, including six assistant secretaries: Peter McCarthy, Phillip Swagel, Neel Kaskari, Ken Carfine, Dave Nason and Kevin Fromer, who led the Treasury's negotiating team on Capitol Hill.

With a change in administrations looming, many of the people involved in organizing the program will not be retained to manage it.

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