Solving the Credit Crisis: Treasury's Fast and Subtle Call for Sourcing Providers

Last week, I was on a call with Sam Kinney (FreeMarkets co-founder) and a couple of folks from the Department of Treasury to provide input about how best to use reverse auctions and other negotiation approaches (e.g., optimization) to achieve Treasury's objectives of buying up debt and related mortgage-backed securities. Dave McCormick, who serves as Under Secretary for International Affairs in the Department of Treasury, is ex-FreeMarkets and is very familiar with reverse auction models. It is many people's belief that this format will help achieve the "sourcing" objectives that Treasury may be tasked to achieve in the coming weeks and months.

Sometimes the government moves fast. Less than a week after our discussions, Treasury has posted an RFP for custodian services including reverse auction providers as part of the initial response to the $700 billion funding bill. RESPONSES ARE DUE NO LATER THAN WEDNESDAY. In our quick opinion, the way this will most likely work is that Treasury will award the business to a custodian provider (the prime contractor) who will then need to sub the sourcing component to a full-service sourcing provider. Specifically, the RFP calls for the following in the sourcing area:

- Serve as auction manager for reverse auctions (one or more buyers, multiple sellers) to acquire mortgage-related securities for the portfolio.
- Design, implement, and test complex auction formats under highly compressed deadlines.
- Conduct multiple simultaneous auctions with multiple rounds and with up to thousands of interested sellers.
- Provide the technical infrastructure to collect and process bids from participants, provide appropriate results to participants during auctions, and provide customer service to auction participants before, during, and after auctions.
- Work with brokers, dealers, and book entry systems providers to authenticate beneficial owners, protect against collusion by auction participants, conduct pre- and post-auction validations, and clear and settle transactions.
- Provide the Treasury with expert advice on the detailed design of auctions to achieve the policy goal of fostering price discovery and observable valuations.

Given that none of the sourcing providers that I know of are qualified to serve as a prime contractor for the custodian services, we would strongly encourage potential providers to write a short letter of interest (3-5 pages) and send it immediately to the contracting officer if you believe that you are qualified (further information is contained in the PDF document accessible via the link below). This will at least provide a record of your capabilities with Treasury and alert them to your interest as a possible sub-contractor. Good luck.

You can find the full RFP and contact details here.

- Jason Busch (with input from Sam Kinney)

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