A Congressional panel has asked the Federal Reserve for details on its decision to hire BlackRock Inc. to manage $30 billion in assets held by the Fed after JPMorgan Chase & Co.’s buyout of Bear Stearns Cos. Rep. Henry Waxman, who is the chairman of the House Oversight and Government Reform Committee, wrote a letter asking New York Federal Reserve Bank President Timothy Geithner to explain how officials decided to pick BlackRock, the terms of their agreement with the firm and what plans the Fed has to oversee its handling of the portfolio. Rep. Waxman, who is becoming a real champion for consumers, which include investors, observed:
It appears that BlackRock is serving as a government contractor providing complex financial services to the Federal Reserve. If BlackRock does its job well, the taxpayers will be made whole or even experience a gain. If BlackRock is not successful, the taxpayers stand to lose billions of dollars.
The Fed, attempting to stave off the bankruptcy of Bear Stearns, agreed to take illiquid assets off the company’s balance sheet to encourage JPMorgan to buy the firm. Most of the investments were mortgage-backed securities and “related” items. BlackRock will attempt to sell the assets to pay back the Fed and JPMorgan. Federal Reserve Chairman Ben S. Bernanke tried to justify not taking bids on this contract when he told the Joint Economic Committee of Congress last month that it was “simply not practical” to put the job out to competitive bidding “given the short time period” for brokering the Bear Stearns agreement. Congress is entitled to know, according to Rep. Waxman, whether the Fed intends to eventually open up “this potentially lucrative position” to competitive bidding in order to ensure that “taxpayers are getting the best value for their money.” Rep. Waxman is also concerned about what he called the bank’s “apparent lack of concrete terms” with BlackRock, noting that Bernanke told Congress on April 2nd that the firm is working “on a fee-to-be-determined-later basis.” Rep. Waxman says his committee’s investigations have shown that “when contract terms are not defined in advance, it is usually the taxpayer — not the contractor — who suffers.” I certainly agree with that assessment. A no-bid contract with no set fee agreement in place can’t be a good thing for taxpayers who will foot the bill. What do you think?
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