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.

Source:  http://www.washingtontechnology.com/print/23_16/33828-1.html?page=1