Answering the bailout call

It is not clear how the Office ofManagement and Budget intends toscore the bailout asset acquisitionspending and subsequent restitution forbudget purposes.Overall, the outlook is uncertain.Predictions are volatile, as are the fluctuationsin global stock marketvaluations."We are watching the bailout closelybecause first, it's huge, and second,because it's unique," said Alan Chvotkin,senior vice president at the ProfessionalServices Council, a trade group for servicecontractors to the federalgovernment.Contractors are likely to see opportunitiesrelated to the bailout develop in stages,and defense and domestic priorities willbecome clearer in time. Meanwhile,experts are advising vendors to take aclose look at what is happening in themarket rescue program because it couldredefine contracting rules and set precedentsin unexpected ways."This is larger than any other activity atthis time and will draw a lot of attention,"Chvotkin said. "It would not surprise me ifmany of our federal contractors areengaged in providing professional services,information technology and financialservices in support of the bailout."The value of the new opportunities thatwill be created is unclear, said DeniecePeterson, principal analyst for industryanalysis at Input Inc., a market researchfirm in Reston, Va. She authored a studyon the bailout Oct 16."The value will depend on how muchinfrastructure will be required to implementthe bailout," Peterson said. That isnot known, but there are some hints. Forone, there might be substantial requirementsfor information security and cybersecurityfor the agencies and firms overseeingthe bailout, she said.Congress authorized the purchase of asmuch as $700 billion in troubled mortgageassets to stabilize the nation's creditmarkets ? an amount nearly as high asthe projected fiscal 2008 expenditure forthe Iraq War. The sale of those assets willoffset a portion of that amount, but theamount and timing of those sales is notknown.The 451-page legislation creates theTroubled Asset Relief Program (TARP),which allows the Treasury Departmentto buy shaky assets from any financialinstitution. Unlike Hurricane Katrinaand the Iraq War, the asset buying isconsidered an emergency need. Itsauthorization expires Dec. 31, 2009,but can be extended as long as twoyears.Contractors are needed to help runthe asset relief program through thenew Office of Financial Stability andOffice of the Special Inspector Generalfor the TARP. Treasury has publishedsolicitations for financial institutionswith expertise in custodian, accounting,auction management, and other infrastructureservices; securities asset management services; and whole loan assetmanagement services. The governmentannounced Oct. 14 it had hired Bank ofNew York Mellon as custodian of thefund.Contractors might be hired directlyby the government or as subcontractorsby the financial services firms overseeingthe asset purchases and sales,Peterson said."Treasury is expecting the financialinstitutions to have the resources theyneed," she said. The "government is alsoexpecting the firms to have data safeguardsin place."If the firms are not ready to provideall that for the hundreds of billions ofdollars in mortgage loan assets, therecould be a substantial opportunity forIT software, cybersecurity and infrastructurefirms, she said.Because TARP is an emergency need,Congress gave the Treasury secretaryauthority to waive the FederalAcquisition Regulation if it is in thepublic's best interest. To protect taxpayers,Congress requires justifications,and there must be plans to includeminority and women contractors.Treasury also issued guidelines to curbconflicts of interest among contractors.The FAR exception is raising themost hackles. "It was completely unnecessaryto put that provision in the bill,"said Lloyd Chapman, founder of theAmerican Small Business League. "Itcontinues the Bush administration'strack record of loopholes to divert contractsto large businesses."Peterson agreed that the language iscontroversial. "Without the structure ofthe FAR in place, there is concernamong Congress and industryobservers that the outcome will resemblea 'mini-earmark' situation whereselect vendors benefit and there is nocertainty that the government is receivingthe best value for its money," shesaid. Conversely, Treasury SecretaryHenry Paulson has stated an intentionto follow FAR and use women andminority contractors when possible, sheadded.Chvotkin said the contracting relatedto the bailout is likely to happen in threephases, and more small-business contractsare expected to be generated inthe second and third segments. Thefirst phase might consist of hiring financialagents; the second phase would beestablishing and supporting oversightoffices, which will generate a demandfor 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 willneed contractor support, he said."Over time, this crisis will level out,and I would expect you would see normalprocurement processes andrequirements," Chvotkin said. "Everytime Congress writes in exceptions dueto urgency, you see reluctance to ask forthose waivers."Presidential candidates Sens. JohnMcCain (R-Ariz.) and Barack Obama(D-Ill.) have promised top-to-bottomreviews of federal budgets if they areelected. The outcome might free fundingfor their priorities in health care,energy and tax reform, while alsoreducing underperforming, costly orlower-priority programs, Peterson said.But economic pressures might forceeither candidate to take more drasticmeasures.Meanwhile, there is much speculationabout the effect of the bailout on thecountry's defense contracting budget.Industry experts have said that althoughthe exact impact is unknown, it is unrealisticto think military weapons programsand IT spending will remain untouched.However, there are suggestions thatdefense budgets won't change much atleast for a year. As long as global threatsagainst national security remain high,military spending will not likely bealtered substantially, Loren Thompson,chief operating officer at the LexingtonInstitute, a conservative think tank, saidin an Oct. 15 report."Demand for defense goods is drivenmainly by overseas threats and domesticpolitics," Thompson wrote. "Militaryspending always spikes when threatsarise, regardless of economic or fiscalconditions. Threats usually trumppolitics."Thompson also said weapons programsmight survive because spendingon military personnel is likely to moderate,it takes a long time to change militaryspending priorities, and weapons spendingwill be fiercely defended from thesecurity point of view and as a spur to theeconomy.