Treasury Concern About Conflicts at BONY Mellon

Emails and documents exclusive to FOX Business reveal serious concern among government officials over potential conflicts of interest involving Bank of New York Mellon in the bailout programs.

FOX Business received the emails and documents after it won a Freedom of Information Act lawsuit against the US Treasury to disclose details of the government's bailout programs.

BONY Mellon is now the master overseer of various Treasury Dept. and Federal Reserve bailout programs, including the Treasury's Troubled Assets Relief Program (TARP), which has invested in banks, including Citigroup, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, and Wells Fargo.

In its TARP contract, BONY Mellon is charged with ensuring that the banks receiving TARP funds certify that they are in compliance with the TARP's executive compensation restrictions.

BONY Mellon beat out 70 other companies to win the government's biggest bailout contract to date.

After it won the contract, BONY Mellon then received $3 bn in TARP funds, after selling preferred shares to the US Treasury. The Treasury also received warrants in BONY Mellon, a Treasury official says.

The fear is, Bank of New York Mellon was put in the awkward position of monitoring itself. In addition, BONY Mellon is getting paid by the government to make sure that the bank itself has certified that it is in compliance with TARP restrictions on executive compensation.

BONY Mellon chairman and chief executive officer Robert Kelly pocketed $33mn in executive pay in 2008 and 2007.

Mr. Kelly also got his bank to pay for the use of its jet, plus pay for his own chauffeur, parking, club dues and home security-and his IRS bills to pay for all of these perks.

Ensuring that the bank executives have certified they are in compliance with TARP restrictions is critical to soothing public outrage, amidst heightened government concern over bonus payments at AIG and Merrill Lynch, both of which received government bailout money.

Treasury Emails Reveal High-Level Concern

Treasury officials in its banking, finance, ethics, general law and regulations divisions exchanged a flurry of emails showing intense agitation over potential conflict of interest problems in the BONY Mellon bailout contracts.

Many of the emails carried the subject line "Conflict of Interest analysis--BONY Mellon."

"Have you heard from BONY" regarding the conflict of interest analysis?, a Treasury official wrote in one email.

"Where is the BONY conflict of interest analysis?" writes another official.

"He PROMISED it in a matter of minutes. And also apologized profusely for the delay," reads another.  

"We would like to have this finalized and signed by both parties as soon as possible," writes another Treasury official.

"Have you heard from BONY" regarding the analysis?, another official wrote.

When told "not yet," the Treasury official replied: "CRAP." 

TARP Restrictions on Executive Pay Cover BONY

TARP Restrictions limits the tax deduction for senior executive officers to amounts at or below $500,000 per year, without any exemption for performance-based compensation.

It also restricts any golden parachute payments to a senior executive, or any of the next five most highly compensated employees.

And it requires company boards to have a company-wide policy regarding excessive or luxury expenditures. TARP also forces a CEO and chief financial officer to annually certify compliance with the law's new pay restrictions.

Congressional legislation also restricts bonuses to no more than a third of total annual compensation.

How will the TARP restrictions affect Robert Kelly, chairman and CEO of Bank of New York Mellon? Here's what Mr. Kelly receives:

Salary: $975,000 in 2007; $994,000 in 2008

Bonus: $7.5 mn in 2007; none in 2008 (likely due to the TARP restrictions)

Stock awards: $3.6 mn in 2007; $5.2 mn in 2008

Options awards $2.1 mn in 2007; $4.6 mn in 2008

Pension and deferred compensation: $4.3 mn in 2007; $2.2 mn in 2008

Relocation from Pittsburgh to New York: $845,696 in 2007; $11,421 in 2008

Company car and driver $178,879 in 2007; $186,000 in 2008

Personal use of corporate aircraft: $84,711; $11,700 in 2008

Financial planning services: $66,748 in 2007

Personal car and related expenses: $16,330 in 2007

Club memberships: $12,830 in 2007; $8,500 in 2008

Parking: $4,669 in 2007

Home security: $1,940 in 2007; $4,600 in 2008

401 (k) contributions: $10,125 in 2007; $10,219 in 2008

Insurance premiums: $1,306 in 2007; $98,545 in 2008

IRS Bill for personal perks: $437,993 in 2007; $9,095 in 2008

BONY Mellon's Bailout Fees

The government hired BONY Mellon to act as master custodian for the "Troubled Asset Relief Program" (TARP) and the "Term Asset-Backed Securities Loan Facility" (TALF) at the Federal Reserve.

BONY Mellon also is the custodian for the Treasury's "Systemically Significant Failing Institutions Program" (SSFIP) which for now covers only AIG, and the "Targeted Investment Program" (TIP), which for now covers Bank of America and Citigroup.

BONY Mellon also receives fees as custodian for the "Automotive Industry Financing Program". BONY Mellon will also be asked to act as custodian for the assets Treasury gets via the new bad bank asset plan, or the "Public Private Investment Funds," the Treasury official says.

What all of this means is, BONY Mellon is the master custodian for the Treasury's bailout investments, it performs all of the investment and loan bookkeeping, reporting, custody services, "and maintains a subsidiary ledger feeding the Treasury's own primary ledger of its investments," a Treasury official says.    

BONY Mellon's fees are based on the value of the assets under custody in the programs. The Treasury estimates BONY Mellon will receive $20 mn over the three-year period of the TARP contract, a Treasury official says.

The Treasury Dept. is adamant that all of the TARP investments, including the investment in BONY Mellon "are reported, audited, valued, accounted for, etc., in the same manner," a Treasury official says, adding that the Treasury "independently calculates and monitors the remittance into the Treasury of all dividends, including those owed by BONY Mellon to the Treasury." 

The Treasury official also notes the department "renegotiated our contract with BONY after the scope of work changed from buying up troubled assets to a focus on capital injections to save taxpayer dollars."

BONY Mellon gets paid a flat fee plus a cut of TARP's investments in the TARP banks.

Specifically, the FOIA documents say that BONY Mellon will "receive a monthly fee of one-twelfth of 0.0015% of the daily average aggregate acquisition value of preferred shares, C Corporation stock, senior debt, and other obligations, excluding warrants," adding that BONY Mellon is "subject to a minimum annual fee of $2 mn that will be billed monthly on a pro rata basis."

The acquisition value is the amount the Treasury paid to acquire the preferred shares or other investments in the banks. 

The fee is reduced to $1.5 mn when the number of TARP investment positions, excluding warrants, decreases to half of its peak.

The minimum annual fee is again reduced to $750,000 when the number of TARP investment positions, excluding warrants, is cut to 25% of its peak.

As noted, the Treasury estimates BONY Mellon will get paid "approximately $20 mn total over the first three years" of the contract.

Given that its fee is based on a portion of the TARP investments, BONY could see significantly more money in this contract if the TARP adds more banks to the bailout program.

However, both Treasury and BONY Mellon officials say there is no plan yet to pay BONY Mellon a portion of the value of the common shares Treasury would receive, after the department completes its stress tests of the 19 banks.

No Fees For BONY to Monitor BONY

And the Treasury's $3 bn investment in BONY Mellon is not included in the calculation of its fee, officials note. "There will be no fee related to the custody of these investments," a Treasury official says.

Other Bailout Fees BONY Gets

BONY Mellon also will receive $75,000 for its work on the Significant Failing Institutions Program (SSFIP), over three years, which relates to one institution (AIG). 

If more "too big to fail" companies enter this program, then BONY Mellon gets paid more money.

And as of right now, BONY Mellon will receive $150,000 related to the Targeted Investment Program, or TIP, which for now covers Citigroup and Bank of America. 

Again, if more companies enter this program, then BONY Mellon gets paid more money.

Also, BONY Mellon will receive $375,000 related to the Auto program, which now covers investments and loans given to General Motors, Chrysler, GMAC, and Chrysler Financial.

Likewise, if more companies enter this program, then BONY Mellon gets paid more fees.

And a Treasury official says BONY Mellon would also provide custody of the Treasury's capital investment in the Public Private Investment Funds. The BNY Mellon fee structure has not been established yet. 

"BONY Mellon would only have custody of the Treasury's investment in a given fund," the official says, adding the bank "would not be the custodian for the specific troubled assets purchased by a fund" and that  BONY Mellon fee for this contract" has not been established" yet.

But it is expected the bank will get a flat fee to handle the one-time capitalization of the funds, which would have nothing to do with the specific investments that the funds make in toxic assets. 

Each fund would have its own custodian independent of the Treasury, the department official says.

BONY Monitors Executive Compensation Certifications

"In our role, there are certain conditions that need to be met before the Treasury kind of transmits the investment to a particular TARP recipient," a BONY Mellon spokesman says, adding "one of the things the company [TARP recipient] has to certify, that have to provide a certification that they will comply with the executive compensation provisions of TARP.

The bank spokesman adds: "It's our role in doing a checklist at the closing of the investment, to make sure that the company has supplied a certification that they will follow the executive compensation provisions," adding the contract doesn't mean "we are in the position of tracking" executive compensation at TARP recipients.

BONY Safeguards Against Conflicts of Interest

The BONY Mellon spokesman says the bank has installed " several safeguards..to avoid or mitigate potential conflicts of interest.

Bank employees charged with working on the Treasury's contracts "are required to sign a non-disclosure agreement, which requires them not to divulge confidential information," the bank spokesman says.

He adds:  "We have a securities firewall policy in place, which walls off these employees from the units or individuals that trade assets on behalf of the company or its clients."

And the spokesman notes:  "Employees are subject to our personal securities trading policy, which is designed to prevent employees from using information for their own personal trading advantage. Personal trading is monitored for potential conflicts of interest or misuse of information.  We also have a comprehensive code of conduct that all employees are required to certify their compliance with annually."

Also, the Special Inspector General for TARP, who reports to Congress, is charged with monitoring the bank's work, as well as the Government Accountability Office, which has a role in reviewing TARP and also reports to Congress.