March 2 (Bloomberg) -- Pacific Investment Management Co. was hired to advise the U.S. government on the value of $118 billion of assets guaranteed in the bailout of Bank of America Corp., said two people with knowledge of the decision.

Pimco will evaluate Bank of America’s holdings, including securities backed by residential and commercial loans, to help determine the company’s losses, said the people, who asked not to be identified because the contract hasn’t been publicly disclosed.

The assignment from the Federal Reserve, and a similar job tied to a federal guarantee of $80 billion of credit union deposits, occurred after the Newport Beach, California-based firm raised $3 billion for a distressed credit fund to invest in mortgage-backed securities. BlackRock Inc., the largest publicly traded U.S. asset manager, also is investing in mortgage-linked debt and overseeing similar troubled assets for the government. Their dual roles increase the possibilities for conflicts of interest, said U.S. Representative Scott Garrett.

“Pimco and others potentially have two masters to serve: the U.S. taxpayer and their own fiduciary obligations to clients,” Garrett, a New Jersey Republican and member of the House Financial Services Committee, said in an interview.

Bank of America, based in Charlotte, North Carolina, got the asset guarantees on Jan. 16 as part of the government’s program to stabilize financial markets. It had agreed to buy Merrill Lynch & Co., which disclosed a fourth-quarter loss of $15.4 billion on toxic assets, forcing the bank to seek assistance. Bank of America also agreed to buy mortgage lender Countrywide Financial Corp. in January 2008.

Separate Offices

Mark Porterfield, a Pimco spokesman, declined to comment, as did BlackRock spokeswoman Bobbie Collins and Scott Silvestri, a Bank of America spokesman.

Bank of America falls under the oversight of the Federal Reserve Bank of Richmond, Virginia.

“It is inappropriate for me to comment on those types of arrangements,” Lisa Oliva, vice president of public affairs at the Richmond Fed, said in an interview.

Bill Gross, chief investment officer of Pimco, said in an interview with Bloomberg News in October that the investment professionals who advise the government or manage funds for it work separately from those who oversee the firm’s $747 billion in client assets. Gross, who runs the world’s largest bond fund, said the people working on the government contracts are housed in a different building and investment teams aren’t permitted to communicate with them.

DiSCO Fund

BlackRock, based in New York, manages more than $80 billion in government-held assets previously owned by American International Group Inc. and Bear Stearns Cos., under agreements in March and November with the Federal Reserve and the New York Fed. Chief Executive Officer Laurence Fink said in conference calls in July and December that its investment and advisory divisions are separated.

The recently completed Pimco Distressed Senior Credit Opportunities Fund, known as DiSCO, will buy “senior” and “super-senior” debt backed by commercial and residential mortgages, according to the investor, who asked not to be identified because the fund is private. Pimco, at the onset of the housing collapse in 2007, raised more than $2 billion for a separate pool to buy troubled mortgage debt as home prices slumped and defaults on subprime mortgages increased.

Geithner’s Plan

The company’s funds target securities similar to those it’s analyzing for government agencies at Bank of America and the credit unions. They include commercial, residential and other consumer loans, and securities tied to such debt.

Treasury Secretary Timothy Geithner pledged as much as $2 trillion this month to start the process of getting toxic assets off the books of banks so they can resume lending. His plan calls for public-private financing, with as much as $1 trillion for private companies to buy bad debt. Valuing assets held by banks would be a first step toward getting private investors to buy some of the assets.

Bonds are considered distressed if they yield 10 percentage points more than Treasuries with similar maturities, indicating investors are concerned that the issuer will default. Investors typically buy such debt to bet that a company can renegotiate loan agreements to avoid bankruptcy or to reap gains in liquidation.

“There are trillions of dollars of distressed securities out there,” said Eric Petroff, director of research at Seattle- based Wurts & Associates, a consultant to institutional investors such as pension plans. “The government has got to get the markets going again and it makes sense for money managers like Pimco to get involved.”

Credit Union Protection

The Fed chose Pimco in October to manage short-term corporate debt purchased by the government in an effort to boost liquidity in commercial-paper markets. Pimco was among four money managers that won a Fed contract in December to oversee a $500 billion program to buy mortgage-backed securities.

The National Credit Union Administration, which regulates U.S. credit unions, injected $1 billion into lenders in January to offset losses tied to asset-backed securities. The agency hired Pimco to determine whether more capital is required, Larry Fazio, the NCUA’s deputy executive director, said in a Jan. 29 interview.

On Feb. 27, a trade group of credit unions filed a Freedom of Information Act request seeking details from the NCUA on the Pimco contract. The group asked for specifics of Pimco’s analysis and how much it’s being paid, the Arlington, Virginia-based National Association of Federal Credit Unions said in a statement.

Transparency Needed

Representative Garrett said he posed questions about potential conflicts of interest for money managers working for the government more than six months ago with former Treasury Secretary Henry Paulson, and has not received any answers.

Phillip Phan, a professor of management at Johns Hopkins Carey Business School in Baltimore, said the government needs to be transparent on how it awards contracts to avoid the perception that there are conflicts.

“There is no question that exposure to conflicts of interest are very high, if you are an adviser and a potential buyer,” Phan said in an interview. “But frankly, these are the only folks that are willing to take the risk in this environment,” he said, referring to money managers.

Pimco, a unit of Munich-based insurer Allianz SE, oversees mutual funds, closed-end funds and separately managed accounts for 8 million investors in the U.S. The $136 billion Pimco Total Return Fund, managed by Gross, had 83 percent of the fund’s assets in mortgage-backed securities at the end of January, the highest in at least a year. He has added to securities that benefit from government spending to curb the global recession.

Pimco’s view is to “shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond,” he wrote last month.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net.

Last Updated: March 2, 2009 00:01 EST