Answering the bailout call

Financial rescue plan likely to fuel new business for contractors

Seeking to calm the storm that
has rocked the global financial
markets, Congress and
President Bush approved a monumental
$700 billion financial services
bailout last month. Because the Wall
Street rescue package is so massive, it
might overwhelm other priorities and
reduce federal contracting in the coming
months.

But there are some silver linings to
the recent clouds.
  • The bailout is creating new federal
    oversight structures that will require
    support systems that produce some new
    opportunities for federal contractors.
  • The timing of the bailout ? and the
    fact that funds will be restored to the
    U.S. Treasury as the government-acquired
    assets are rehabilitated and
    sold to investors ? will blunt the
    bailout's budget effect to some degree.
  • Despite the changing global economy,
    analysts are predicting relative stability
    in defense spending for at least a year
    because of continued national security
    needs.

It is not clear how the Office of
Management and Budget intends to
score the bailout asset acquisition
spending and subsequent restitution for
budget purposes.

Overall, the outlook is uncertain.
Predictions are volatile, as are the fluctuations
in global stock market
valuations.

"We are watching the bailout closely
because first, it's huge, and second,
because it's unique," said Alan Chvotkin,
senior vice president at the Professional
Services Council, a trade group for service
contractors to the federal
government.

RULES REDEFINED

Contractors are likely to see opportunities
related to the bailout develop in stages,
and defense and domestic priorities will
become clearer in time. Meanwhile,
experts are advising vendors to take a
close look at what is happening in the
market rescue program because it could
redefine contracting rules and set precedents
in unexpected ways.

"This is larger than any other activity at
this time and will draw a lot of attention,"
Chvotkin said. "It would not surprise me if
many of our federal contractors are
engaged in providing professional services,
information technology and financial
services in support of the bailout."

The value of the new opportunities that
will be created is unclear, said Deniece
Peterson, principal analyst for industry
analysis at Input Inc., a market research
firm in Reston, Va. She authored a study
on the bailout Oct 16.

"The value will depend on how much
infrastructure will be required to implement
the bailout," Peterson said. That is
not known, but there are some hints. For
one, there might be substantial requirements
for information security and cybersecurity
for the agencies and firms overseeing
the bailout, she said.

Congress authorized the purchase of as
much as $700 billion in troubled mortgage
assets to stabilize the nation's credit
markets ? an amount nearly as high as
the projected fiscal 2008 expenditure for
the Iraq War. The sale of those assets will
offset a portion of that amount, but the
amount and timing of those sales is not
known.

SUPPORT ROLE

The 451-page legislation creates the
Troubled Asset Relief Program (TARP),
which allows the Treasury Department
to buy shaky assets from any financial
institution. Unlike Hurricane Katrina
and the Iraq War, the asset buying is
considered an emergency need. Its
authorization expires Dec. 31, 2009,
but can be extended as long as two
years.

Contractors are needed to help run
the asset relief program through the
new Office of Financial Stability and
Office of the Special Inspector General
for the TARP. Treasury has published
solicitations for financial institutions
with expertise in custodian, accounting,
auction management, and other infrastructure
services; securities asset management services; and whole loan asset
management services. The government
announced Oct. 14 it had hired Bank of
New York Mellon as custodian of the
fund.

Contractors might be hired directly
by the government or as subcontractors
by the financial services firms overseeing
the asset purchases and sales,
Peterson said.

"Treasury is expecting the financial
institutions to have the resources they
need," she said. The "government is also
expecting the firms to have data safeguards
in place."

If the firms are not ready to provide
all that for the hundreds of billions of
dollars in mortgage loan assets, there
could be a substantial opportunity for
IT software, cybersecurity and infrastructure
firms, she said.

Because TARP is an emergency need,
Congress gave the Treasury secretary
authority to waive the Federal
Acquisition Regulation if it is in the
public's best interest. To protect taxpayers,
Congress requires justifications,
and there must be plans to include
minority and women contractors.

Treasury also issued guidelines to curb
conflicts of interest among contractors.
The FAR exception is raising the
most hackles. "It was completely unnecessary
to put that provision in the bill,"
said Lloyd Chapman, founder of the
American Small Business League. "It
continues the Bush administration's
track record of loopholes to divert contracts
to large businesses."

Peterson agreed that the language is
controversial. "Without the structure of
the FAR in place, there is concern
among Congress and industry
observers that the outcome will resemble
a 'mini-earmark' situation where
select vendors benefit and there is no
certainty that the government is receiving
the best value for its money," she
said. Conversely, Treasury Secretary
Henry Paulson has stated an intention
to follow FAR and use women and
minority contractors when possible, she
added.

Chvotkin said the contracting related
to the bailout is likely to happen in three
phases, and more small-business contracts
are expected to be generated in
the second and third segments. The
first phase might consist of hiring financial
agents; the second phase would be
establishing and supporting oversight
offices, which will generate a demand
for financial analysis and IT systems;
and the third phase would be monitoring,
auditing and distributing assets.

Related activities in restructuring AIG,
Freddie Mac and Fannie Mae also will
need contractor support, he said.
"Over time, this crisis will level out,
and I would expect you would see normal
procurement processes and
requirements," Chvotkin said. "Every
time Congress writes in exceptions due
to urgency, you see reluctance to ask for
those waivers."

Presidential candidates Sens. John
McCain (R-Ariz.) and Barack Obama
(D-Ill.) have promised top-to-bottom
reviews of federal budgets if they are
elected. The outcome might free funding
for their priorities in health care,
energy and tax reform, while also
reducing underperforming, costly or
lower-priority programs, Peterson said.

But economic pressures might force
either candidate to take more drastic
measures.

DEFENSE SPENDING SAFE

Meanwhile, there is much speculation
about the effect of the bailout on the
country's defense contracting budget.
Industry experts have said that although
the exact impact is unknown, it is unrealistic
to think military weapons programs
and IT spending will remain untouched.

However, there are suggestions that
defense budgets won't change much at
least for a year. As long as global threats
against national security remain high,
military spending will not likely be
altered substantially, Loren Thompson,
chief operating officer at the Lexington
Institute, a conservative think tank, said
in an Oct. 15 report.

"Demand for defense goods is driven
mainly by overseas threats and domestic
politics," Thompson wrote. "Military
spending always spikes when threats
arise, regardless of economic or fiscal
conditions. Threats usually trump
politics."

Thompson also said weapons programs
might survive because spending
on military personnel is likely to moderate,
it takes a long time to change military
spending priorities, and weapons spending
will be fiercely defended from the
security point of view and as a spur to the
economy.

Alice Lipowicz (alipowicz@1105govinfo.com)
is a staff writer at Washington Technology.

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