Monday, 12 August 2002, 11:32 am
Column: Catherine Austin Fitts
Mortgage Market Unanswered Questions – Hitting On HUD
Questions For Investors and Financial Analysts
to Ask the
United States Department of the Treasury
re: the Integrity of the
US Mortgage and Mortgage Securities Market
Related to the Award of $4 Billion
Computer and Information Systems Outsourcing:
HUD Information Technology Service (HITS) Solicitation # R-OPC-21970 
(Award by HUD Expected in Fall 2002)
Related to Data Management, Data Integrity & Financial Management at:
The Department of Housing and Urban Development (“HUD”) 
For the: Federal Housing Administration  ($500 Billion Mortgage Insurance)
Ginnie Mae  ($600 Billion Mortgage Securities)
Office of Federal Housing Enterprise Oversight 
HUD Office of Inspector General 
By Catherine Austin Fitts, Solari, Inc. 
Former lead HUD financial advisor, Clinton Administration
Former Assistant Secretary of Housing, First Bush Administration
Former Managing Director and Member of the Board, Dillon, Read & Co. Inc.
“Three things make earth unquiet
And four she cannot brook
The godly Augur counted them
And put them in a book –
Those Four Tremendous Curses
With which mankind is cursed;
But a Servant when He Reigneth
Old Augur entered first.”
— Rudyard Kipling, “A Servant When He Reigneth”
QUESTIONS: INFORMATION SOVEREIGNTY
When the federal government outsources its computer, accounting, payment and information systems, non-governmental employees control and manage the government’s most confidential databases and operational and financial flows. This raises questions as to whether or not a government can be sovereign when government workers loyal to the oath of government office do not have control or intellectual mastery over government work, cash flows and information and do not have the power (whether for reasons of politics or operational dependency) to fire private corporations for failure to perform.
In 2000, the US Department of Housing and Urban Development (“HUD”) Inspector General refused to certify HUD’s financial statements as required by law, referring to the failure of HUD’s accounting system, HUDCAPS. HUDCAPS was a then-new accounting system installed by HUD contractor American Management Systems (“AMS”) that, presumably, ran on computer hardware and systems provided by the HITS predecessor contractor, Lockheed Martin and its numerous subcontractors, including DynCorp. Despite the fact that HUD had paid AMS $206 million for this system and that HUD’s Acting Chief Financial Officer recommended HUD not use the HUDCAPS system, HUD did not terminate AMS’s contract for failure to provide a working system  and HUD continued to use the HUDCAPS system, the implication being that HUD was too dependent on AMS to fire them. 
Question: What steps has HUD taken to ensure that senior government career civil service officials have intellectual mastery and control of the HITS workflow sufficient to oversee, hire and fire and not be operationally dependent on outside contractors?
Question: What arrangements does HUD contemplate for providing back-up contractors to take over performance of the HITS contract in the event the primary contractor selected either cannot or does not perform according to the final contract?
Question: What steps has HUD taken to provide for audit of contractor performance and data and system integrity to ensure against leakage of valuable data that can be used for insider trading or other benefit in the stock, bond, mortgage and mortgage securities markets?
Question: Who are the major holders of equity in the companies bidding for the HITS contract? In terms of stock market valuation, how much is winning the HITS contract worth to the stock holdings of the officers, directors and major stockholders?
Question: According to his Congressional confirmation testimony, HUD’s new Inspector General, Kenneth M. Donohue, spent five years working for a government contractor before joining HUD. It is unusual, then, given tradition, that at no time during the nomination or Senate confirmation was the name of this contractor disclosed by the press and that HUD’s website likewise does not include this detail. The HUD IG’s confirmation hearing statement reads as follows: “My past five years have been in the private sector consulting on law enforcement and investigative issues. This also provides a strong foundation for the task that lies ahead, if I am confirmed. For example, I recently completed a multi-year contract with a classified program at the Central Intelligence Agency that inter-related with U.S. corporations.” What company did Mr. Donohue work for? Is the company one that will be bidding or subcontracting on the HITS contract? Is there a reason the public should know that experience with the CIA would be helpful for a HUD Inspector General? One press announcement mentions the fact that Mr. Donohue’s son works for a global computer company. What company does Mr. Donohue’s son work for? Is this company one that will be bidding or subcontracting on the HITS contract? Please describe potential information sovereignty issues posed by potential personnel or personal family conflicts of interest between HUD and other government contracting, program, legal, enforcement and audit staff related to the predecessor contract, HITS contract or HUDCAPS contract and the companies proposing and their investors and affiliated investments.
Question: According to a recent statement by the lead counsel for Enron’s board of directors, Senator Hollings has sent a letter to Mitch Daniels, Director of the Office of Management and Budget requesting that he make the same certifications of federal financial statements that chief executive officers of public corporations are required to make to the SEC on August 14. Will the HUD Inspector General, the CEO of HUD’s prime HITS contractor or any other responsible official be in a position to make such a certification with respect to HUD’s or FHA’s financial statements? If not, will this affect the award of the HITS contract?
Question: Is HUD prepared to certify that its systems and software have not been compromised by PROMIS  or any trap door or invasive software or system or hackers? If so, how? If not, why not? What steps has HUD taken to ensure that its privacy and financial security cannot be so compromised in the future?
Question: Are you familiar with allegations that DynCorp, a contractor that helps to manage the PROMIS system for the Department of Justice and a contractor and subcontractor of HUD, has used PROMIS to compromise the HUD systems? 
Question: Why has HUD refused to comply with FOIA requests for its contracting budgets for the past three fiscal years? Why does HUD have its contracts organized so that under FOIA law HUD does not have to supply any information regarding HITS subcontractors?
Manufacturer of High-Tech Fighter Jets
Loser of Billions Of US Government Money
QUESTIONS: CONFLICTS OF INTEREST
Question: Has HUD required disclosure from respondents to the HITS Request for Proposals regarding potential conflicts of interest in the form of real estate, mortgage and other investments, the value of which could be affected by HUD policies, held by the respondent or any of its major equity holders, officers or board members or in the form of other investments and directorships?
Question: The HUD Office of Inspector General’s systems are managed by DynCorp, as are many of the Department of Justice (DOJ) information systems used by DOJ in its legal representation of HUD. Does the provision of audit and enforcement contracting services by private contractors compromise the ability of the HUD OIG to oversee or audit contractor performance in the program areas such as HITS if the same contractors should be chosen or contractors related to the same investors? What about potential enforcement actions in the event that a HITS contractor is guilty of civil or criminal violations that are related to or effect contract performance?
Question: Who are the GTRs (Government Technical Representatives) and GTMs (Government Task Managers) on predecessor contracts and HITS? Who is the Chairman of the Selection Board? Are any Schedule C or other political appointees serving on or permitted to have access or communication with the selection board? Have any of the members of the selection board been employed directly or indirectly by companies competing for the HITS contract or for companies owned by the same group of major equity holders? What relationships and prior working experience do these individuals have, if any, with US intelligence agencies and the US Department of Defense?
Question: What are the internal control issues if HUD’s or Ginnie Mae or FHA’s outside auditor also serves as auditor for, or has a significant relationship with, the prime or subcontractor on the HITS contract or companies owned by their large investors?
Question: What contractors work for the HUD contracting offices or have access to confidential information used in the HUD contracting office?
QUESTIONS: ETHICAL STANDARDS
Questions: What “bad boy” restrictions, if any, has HUD placed on the HITS prime contractor or subcontractors in terms of whether such companies, like Arthur Anderson, have been indicted, convicted or paid fines in connection with financial or government contracting fraud?
Question: What steps has HUD taken on HUDCAPS or predecessor and HITS contracts to ensure that no kickbacks have occurred or will occur between contractors and HUD employees?
Question: Is there a limit to the number of civil and/or criminal violations that will be tolerated in a HITS prime contractor or subcontractor? For example, the incumbent prime contractor on HUD’s information systems and at HUD is Lockheed Martin, the largest federal contractor and the largest defense contractor. According to the Federal Contractor Misconduct database at the Project for Government Oversight (POGO), Lockheed is a leader in civil and criminal violations.  For example, in 2000 Lockheed Martin was charged with 30 violations of the Arms Export Control Act and the International Traffic in Arms Regulations. The violations were regarding the transfer of space launch assistance technologies to China. Lockheed Martin paid a civil penalty of $13 million. Do any special oversight provisions apply if HUD hires contractors with demonstrated records as “felons” to manage highly sensitive and valuable data and payment systems?
Question: Edwin Black recently published a book raising allegations regarding IBM’s role in providing the database capacity and support both before and during WWII for the Nazi census that was critical to providing the data on the German population needed to operationalize the Holocaust concentration camps ( see, IBM and the Holocaust: The Strategic Alliance between Nazi Germany and America’s Most Powerful Corporation.)  Black’s work underscores the importance of protecting against abuse of government-collected data. Has HUD informed itself of such risks and made an effort to protect against them? How so? Are Ginnie Mae and FHA mortgage investors at risk of finding that their capital has indirectly financed a newer, subtler version of such activities?
Question: DynCorp recently has been implicated in two lawsuits regarding complicity in white slave trafficking and pedophilia in connection with its federal contracts in Eastern Europe.  Has such behavior affected DynCorp’s eligibility to work at HUD or to compete for the HITS contract as either a prime contractor or subcontractor? Are Ginnie Mae and FHA mortgage investors at risk of finding that their capital is supporting organizations that promote systemic pedophilia and human slave trafficking?
HUD Secretary Andrew Cuomo Signing For The US Govt.
Question: The Center for Public Integrity has made allegations regarding the use of HUD data to increase US citizenship in a manner that would advantage one party over another in the 1996 Presidential elections. Additional allegations exist regarding the use of HUD’s “2020” databases by then Secretary Andrew Cuomo to help with partisan redistricting. What are the steps that HUD is taking to ensure that these kinds of unethical applications of HUD data do not happen now and in the future?
Question: Has HUD asked for information as to whether or not any of the respondents to the HITS RFP or their major equity holders, directors or officers have been involved or implicated in offshore partnerships, maintain off shore subsidiaries or have been implicated in off shore money laundering schemes?
Question: HUD has traditionally taken the position on FOIA that subcontractors are not subject to the same standards of public disclosure as prime contractors. Given the size of the HITS contract, is it conceivable that HUD could take this position with regard to hundreds of millions, if not billions, of dollars’ worth of contracting work? How does HUD propose to achieve taxpayer transparency under these circumstances?
QUESTIONS: COOKED BOOKS
When the HUD IG refused to certify HUD’s financial statements, it was disclosed that HUD had undocumentable adjustments of $59 billion in fiscal 1999. This is the equivalent of $209 for every man, woman and child resident in the US. Further, no audit trail existed in HUD’s records or systems for this money. HUD refused to determine what money what portion of the funds involved in these adjustments against Treasury accounts was, in fact, missing. For the following fiscal year, HUD disclosed there were further undocumentable adjustments but declined to disclose the amount of undocumentable adjustments in fiscal 2000 and 2001.
Question: What steps, if any, has HUD taken since the spring of 2000 to identify how much is missing from HUD (including FHA and Ginnie Mae) accounts and to recover missing amounts? If it has not done so, how can HUD know that its systems are secure and its current contractors trustworthy? If past questions are left unresolved, how can future auditors render clean audit opinions?
Question: Is HUD prepared to certify that no money is missing as a result of any failure to perform or fraud on the part of outside contractors in the management of its information systems? If it has not identified missing money and gotten it back, how can it do so? How is HUD ensuring that it will not have to make further “undocumentable adjustments” in the future, including in connection with HITS?
QUESTIONS: INSIDER TRADING
Question: What are the potential ways that the major equity holders and others who control the prime contractors and subcontractors bidding on HITS contract can use their access to information on the US mortgage and mortgage securities markets or other housing and neighborhood information gained in the performance of the HITS contract to legally profit from trading in the mortgage or securities markets? Is understanding this information not essential for HUD’s contractor oversight, internal control and audit functions?
Question: What are the current investments and interests of the primary equity holders and others in control of respondents to the HITS contract RFP in the current pools of outstanding FHA mortgages and FHA or Ginnie Mae related mortgage securities?
Question: What are the potential ways that these large investors can make money illegally accessing the data and knowledge that the HITS contract provides regarding the US mortgage and mortgage securities markets or other housing and neighborhood information? Is understanding this information not essential for HUD’s contractor oversight, internal control and audit functions?
Question: In terms of stock market valuation, how much is winning the HITS contract worth to the prime and subcontractor’s large investors’ stock value as a result of data and information access? Is it fair to say that the HITS contract data is potentially worth a fortune in terms of its application in trading and investing in the US mortgage markets? Is understanding this information not essential for HUD’s contractor oversight, internal control and audit functions?
Question: What other federal databases are managed by the contractors bidding on the HITS contract (and their partners and major subcontractors)? How can these databases be combined with the HITS databases to create greater value for insiders of the prime contractor or subcontractors??
Question: What are the stock holdings and stock option incentives of the proposed project managers of the prime contractor responders on the HITS contract?
QUESTIONS: RETIREMENT SAVINGS
Question: What has been the growth in ownership by US pension funds of mortgages and mortgage securities whose value is directly or indirectly impacted by FHA, Ginnie Mae and HUD operations and policies?
Question: What are the risks to our retirement savings if private investors are able to engage in insider trading with information gained by access to HITS?
QUESTIONS: INVESTMENT ESPIONAGE
Under HUD’s regulatory leadership and the Department of Justice’s anti-trust policies, a significant portion of the US mortgage market servicing software is provided by Alltel, the successor corporation to Systematics, a firm alleged to be a private manager of PROMIS software.
Question: Given the importance of privacy to the integrity of the US financial system and capital markets, is HUD doing everything it should be doing to ensure the integrity of information systems and software supporting the US mortgage markets? As we saw in the case of Enron’s access to ECHELON technology, are federal regulators allowing a market bifurcation between those with access to investment espionage and those who do not have such access?
Question: Will the contractor managing HITS have access to data available to HUD’s Office for Federal Enterprise Oversight (OFEO)?
US Troops In Bosnia – Protectors Or Abusers?
QUESTIONS: WAR IN LATIN AMERICA, EASTERN EUROPE AND MIDDLE EAST
Question: What are the risks to foreign investors in US mortgages and mortgage securities of the control and management of HUD data by large US defense contractors? Would the HITS contractors be able to identify mortgage and mortgage security investments by investors in those areas of the world where we are contemplating military action? Would such data access be relevant in the competition between the dollar and the euro? Would this be so in the event that military action were initiated to protecting the dollar as the reserve currency for trade, particularly oil trade, and to ensure increased purchases or holdings of US Treasury and other government securities, including mortgage backed securities.
QUESTIONS: WAR ON TERRORISM
HUD collects and manages significant amounts of data about US citizens and residents, including people whose home mortgages are insured by FHA, people who are recipients of housing vouchers and other rental assistance programs and people who live in neighborhoods that receive federal housing funding.
Question: What are the risks of large US defense contractors having access to HUD’s wealth of data about US citizens and taxpayers and investors in the mortgage markets and neighborhoods? Under what conditions might this information be aggregated or crosschecked with IRS, HHS and other federal data for enforcement, seizure and/or debt collection purposes and other purposes not contemplated by the statutes and regulations mandating the collection of data by HUD? Under what conditions might this information be made available to FEMA and the Homeland Security Agency without restriction by the Privacy Act? Will the HUD stakeholders be informed of such uses of data provided by them before it happens?
Question: What are the current contracts of the competing respondents to the HITS contract RFP with FEMA, Homeland Security, the Bureau of Prisons, INS, the DOJ and Treasury Asset Forfeiture Funds and any other revenue generating federal enforcement operations? What about similar state and local government databases? What are the implications of the creation of a few or one master database in private corporate hands?
PRIVACY STANDARDS/PRIVACY ACT
Question: If HUD’s data is controlled and managed by private corporations, on what basis can we be assured that the requirements of the Privacy Act is respected?
Question: What are the restrictions, if any, on outsourcing work, including to companies abroad, by the HITS contractor?
IMPLICATIONS OF JP MORGAN CHASE FINANCIAL PROBLEMS
JP Morgan-Chase is a major servicer for HUD, including Ginnie Mae.
Question: What steps has HUD taken to insulate itself from operational or financial problems if the allegations about JP Morgan-Chases derivative problems or US and global lending exposure are true?
Question: Does JP Morgan-Chase’s involvement in Enron and similar off shore partnerships have any implications for its ethical qualifications to serve as a lead HUD-Ginnie Mae servicer?
Question: If JP Morgan-Chase is under serious financial pressure, is there a significant risk that there would be financial pressure for JP Morgan-Chase to use its access to government servicing data to shore up its own financial position?
Question: The NY Fed is the depository for the US Treasury and manages the Exchange Stabilization Fund. What NY Fed member banks serve as a depository and/or bank for HUD, FHA and Ginnie?