Earlier this month, the Inspector General responsible for overseeing the government’s bailout of the financial sector released an audit of the Treasury Department and federal banking agencies that raised the specter of “external parties” – such as financial institutions – having “undue influence” over the bailout process. In short, the IG concluded that because the Treasury Department and other banking agencies insufficiently document oral communications between external parties and the federal government, it was “impossible” to determine whether bailout decisions were improperly influenced.

When explaining how to fix this disclosure gap, the Inspector General pointed to rules governing lobbying on the $787 billion economic stimulus funds as a good model for the financial bailout. The IG also noted that the Treasury Department announced on January 27, 2009 that it “would develop new rules to increase transparency and curtail potential lobbyist influence” over the financial industry bailout. And yet, the Treasury Department is still “finalizing” its draft policy 7 months after the press release. (More background available from WSJ and the Washington Times.)

It seems, however, that both the IG and the Treasury Department may not have realized that the model they are using for the financial bailout lobbying rules has itself been updated. They also seem to have forgotten about public disclosure of written communications.

Did Treasury Misunderstand the Lobbying Disclosure Rules?

Mike Stern, former senior counsel for the U.S. House of Representatives, wrote about two peculiarities in the Treasury Department’s understanding of the stimulus lobbying rules, as recounted by the IG.

Stern highlights this paragraph from the IG report:

“A Treasury official stated that Treasury’s draft policy for TARP [financial industry bailout] funds is similar to the ARRA [stimulus lobbying] policy. The TARP policy will state that Treasury employees cannot talk to lobbyists or members of the Congress, with one exception—instances of overarching policy discussions.” (emphasis added by Stern)

First, Stern explains that Obama’s revised stimulus lobbying rules treat lobbyists and other interested parties similarly with respect to prohibiting certain communications. Yet, the Treasury official’s statement on the draft financial bailout lobbying rules does not mention other parties as being included in the ban. Second, the revised stimulus lobbying ban likely does not apply to Members of Congress, and yet the Treasury official’s statement states that Treasury employees cannot speak with members of Congress regarding specific projects. (This is probably unconstitutional.)

Even with these problems, the Inspector General embraces the stimulus lobbying guidelines as a model for the financial bailout guidelines. And yet, nowhere does the report mention that the administration has updated and significantly revised its stimulus lobbying guidelines. I wrote about the major revisions earlier.

Based upon Stern’s analysis, there are two instances where the IG report failed to note that the Treasury official’s statement concerning stimulus lobbying guidelines was no longer operative. Moreover, although the IG report summarized the Treasury Department’s interim stimulus lobbying guidelines (which mirror the April 7th stimulus lobbying guidelines promulgated by the OMB), nowhere does the report mention that the stimulus lobbying rules were updated by OMB on July 24th.

Has the Treasury Department failed to update its stimulus lobbying guidelines in accordance with OMB rules? Why weren’t OMB’s updated stimulus lobbying guidelines summarized in the IG report, even if they haven’t yet been adopted by Treasury? Should Treasury use the old or the revised stimulus lobbying guidelines as a model for its financial bailout lobbying guidelines?

What Happened to Disclosing Written Communications About Policy Matters?

There is another problem as well. The original stimulus lobbying rules had a loophole that was closed when they was updated. If Treasury uses the interim Treasury stimulus lobbying disclosure guidelines as a model for its financial bailout disclosure guidelines, and not the revised version promulgated by OMB, it leaves open a tremendous loophole: the absence of public disclosure requirements for written communications by lobbyists (or anyone with financial interests).

The interim OMB rules regarding lobbyists writing to federal employees on policy matters had no public disclosure requirements. The revised OMB rules, however, impose a public disclosure requirement on the writings themselves as well as public disclosure that the communication has taken place.

Specifically, the revised OMB memo tells government employees: “If you receive a written communication from a federally registered lobbyist on behalf of a client or employer concerning Recovery Act policy or projects for funding (including, but not limited to, any written communication from a federally registered lobbyist about a pending application), then please submit that written communication to your designated agency official for posting on the agency’s website within 3 business days of the communication. . . . ” (emphasis added)

The IG report, however, explains that “although Treasury and the banking agencies have processes for documenting and responding to written external inquiries, not all have procedures to document oral communications with external parties when discussing TARP funds.” (emphasis added) In saying this, the report omits any mention of whether the documents that are received by Treasury should be made public. Implicitly, it implies that this is not required.

And if you look further, the IG report’s explanation of the stimulus lobbying guidelines parallels the interim (outdated) OMB guidelines in distinguishing between discrete projects and policy matters. The IG report says that “treasury employees are . . . required to forward written communications from federally registered lobbyists regarding specific projects, applications, or applicants.” The interim stimulus guidelines contrast “specific projects, applications, or applicants” with policy matters. The IG report does not mention general policy matters, and implicitly adopts that dichotomy as well. Indeed, it fails to adopt the language of the revised OMB memo requiring publication on a website of policy communications.

As a result, it is unclear whether the IG is recommending that the Treasury Department publicly disclose the written communications on policy matters submitted from lobbyists to federal employees. Further muddying the waters is the statement by the Treasury official, quoted in the IG report, that seems to exempt “instances of overarching policy discussions” from the financial lobbying ban on Treasury employees speaking with “lobbyists or members of the Congress.” The focus of that section of the report is on oral communications, but it could be interpreted to include written communications as well.

In a private email (that I have permission to quote), Stern writes that “As a practical matter, if a lobbyist wants to communicate in writing with Treasury regarding a TARP/ARRA policy matter and for some reason does not want the communication to be disclosed publicly, he or she could just have the letter signed by a non-lobbyist representative (eg, the client’s CEO).” He is right. This is another issue that Treasury should address.

It is a good thing that the IG is pressing the Treasury Department and other banking agencies to be more transparent, particularly as to lobbying that could place taxpayers on the line for billions of dollars. However, there are many additional questions that must be answered by Treasury and the IG — and soon.