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October 01, 2008

White Collar Crime Review - Oct 1

"Wall St Incompetence Tax", Continued

Last week, the proposed bailout was the big news and the bare bones, 3 page plan for a $700 billion bailout package was being fleshed out. One commentator quoted a Wall St Journal story that Treasury Secretary "Paulson cautioned lawmakers against letting the plan get bogged down in a debate over unnecessary additions." The commentator adds: "'Unnecessary additions' - things like accountability, transparency, making sure that the crisis does not happen again, and making sure that it solves the underlying problem."

The revised plan grew to 110 pages and started to include a few items to strengthen oversight and transparency, and deal with some of the criticisms summarized by this blog last week. The plan was ultimately defeated by the House. As I'm putting together this blog, the Senate is preparing to vote on a very slightly revised plan later tonight. The 'new' plan is exactly like the previous one, except that it also (1) raises the amount of bank deposits that are federally insured, something that helps a little and (2) include tax breaks for businesses, individuals and alternative energy, which really have nothing to do with the problem. The latter are added to attract some votes, even though the tax cuts will enlarge the national debt and could turn some previous supporters away from the new bill.

Some lingering problems: 

- We don't need it

- The problem of what the govt should be paying for toxic securities has not been resolved. As noted last week, the plan seemed to be to pay above market price for them:

Market Value. Repeat after me - M A R K E T V A L U E. This is what can and should be paid for liquifying toxic balance sheets. Not a penny more. The mere fact that Mr. Paulson has been fighting against this tooth and nail has only destroyed his credibility as a bright, pragmatic thinker, a leader that can get us out of this mess. Instead, he reads as a pandering ex-Wall Street executive, a man more concerned with preserving the status quo than helping usher the financial markets into a new, more customer-focused and risk-managed phase.

For those who want more explanation, check out the links from last week and see the commentary of fund manager John Hussman. He provides some helpful examples to make the point that "The only way that buying the questionable assets will increase capital on the liability side of the balance sheet is if the Treasury overpays for them."

- 200 economists sign a letter saying it is unfair, ambiguous and desperately short sighted. For those who want more detail, see the new study by the International Monetary Fund that analyzes 124 banking crises. (Economists were also not keep on the GOP alternate bailout proposal, which has been folded into the new senate version.)

- Reform. The summary by Speaker Pelosi emphasizes Reinvest, Reimbuse (taxpayers) and Reform. But the reform part seems linked to CEO pay - a problem that's been mentioned here the last few weeks, but other areas are in need of much more substantial reform. Granted, this is something that may take some more time and shouldn't be done before Congress runs off to re-elect itself, but how do we make sure it doesn't get forgotten?

The problem has been noted here a number of times over the last few weeks as we've discussed the idea of 'normal accidents' - how human decisions and responsibility gets lost when complex systems break down. To keep this issue front and center, consider reading the full column that this is excerpted from

We on Wall Street feel somewhat compelled to take at least some responsibility. We used excessive leverage, failed to maintain adequate capital, engaged in reckless speculation, created new complex derivatives. We focused on short-term profits at the expense of sustainability. We not only undermined our own firms, we destabilized the financial sector and roiled the global economy, to boot. And we got huge bonuses.

But here's a news flash for you, D.C.: We could not have done it without you. We may be drunks, but you were our enablers: Your legislative, executive, and administrative decisions made possible all that we did. Our recklessness would not have reached its soaring heights but for your governmental incompetence.

The same blog notes that the Securities and Exchange Commission has fewer people working for it than the Smithsonian Institution, the collection of museums in DC. "Indeed, Congress doles out more than five times as much money for corn subsidies ($4.9 billion in 2006, the most recent year for which data are available) as it does for the SEC." There's a $675 Trillion derivatives market that is totally unregulated. The blog concludes: "Gee, how on earth did the 3 million people working in the finance industry ever mange to get away with anything with that type of police enforcement?"

As noted last week, weakening regulations about leverage played an important role in  allowing companies to take on much more additional risk. If you want a better understanding of leverage, check out the interactive feature on leverage from portfolio.com.

Finally, there's some concern that proposals to suspend rules about who firms price securities they own may make the problem worse. The term is 'mark to market' and requires firms to use market prices to value securities they hold. The firms claim that the current market price is not the 'real' price, but reflects distressed and unusual conditions. So they'd like more flexibility to use their own statistical modeling to come up with what they see as the right value.  Obviously, a firm can easily manipulate assumptions on the model to produce very favorable valuations for what it owns, and not really disclose all the assumptions. The 'mark to market' was originally introduced to bring increased transparency to the process. "Suspending mark-to-market accounting, in essence, suspends reality" (link goes to good discussion of the issue). Some are even blaming the requirement for the current problems, which prompted an analyst at JP Morgan to comment: "Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."

Other reading: 

Bailout linkfest  ~ Tally of federal Rescues ~ alternative plans ~ bracket breakdown, the Financial version of the March Madness

Special Prosecutor Named in Federal Attorney Firings Case

The Washington Post summarizes the developments in the two year old/long improper dismissal case:

Investigators probing the firing of nine U.S. attorneys concluded that top Justice Department officials "abdicated their responsibility" by failing to supervise subordinates who carried out the botched plan, according to a long-awaited report released today. 


The investigation uncovered "significant evidence" that partisan political factors played a role in some of the 2006 dismissals. Particularly "troubling," according to the report, was the sacking of New Mexico U.S. Attorney David C. Iglesias after several Republican elected officials complained about voter fraud and public corruption cases he pursued. That episode raises the possibility that obstruction of justice and wire fraud laws were violated.

Justice Department Inspector General Glenn A. Fine and Office of Professional Responsibility Director H. Marshall Jarrett, who had been investigating the basis for the dismissals for 18 months, also cited "inconsistent, misleading or inaccurate" statements by the department's former leaders.

In the 390-page report, issued this morning, they said Gonzales "bears primary responsibility" for the debacle and asserted that he was "remarkably disengaged" from the process, which stretched on for months. Investigators said that after the mass firings came to light, Gonzales made "misleading" public statements about his involvement, failing to recall his attendance at a critical meeting and documents that landed on his desk.


In their strongest conclusions, the Justice Department investigators said that D. Kyle Sampson, the former chief of staff to Gonzales, had committed "misconduct" by making a series of questionable public statements and failing to share information with the White House, lawmakers and his own superiors about the extent of the White House involvement in the firings. 


The internal watchdogs asked that the investigation continue under the authority of a prosecutor with the power to compel testimony and production of documents. They said their probe was thwarted in part because they could not interview key witnesses, including former White House officials Karl Rove, Harriet E. Miers and William Kelley. Investigators also pointed out that the White House refused to turn over internal documents related to the dismissal of the prosecutors by citing the "sensitivity" of the issues, saying the move had "hindered" their inquiry. 

The NY Times adds:

An internal Justice Department investigation concluded Monday that political pressure drove the firings of several federal prosecutors in a 2006 purge, but said that the refusal of major players at the White House and the department to cooperate in the year-long inquiry produced significant “gaps” in its understanding of the events.

At the urging of the investigators, who said they did not have enough evidence to justify recommending criminal charges in the case, Attorney General Michael B. Mukasey appointed the Acting United States Attorney in Connecticut, Nora Dannehy, to continue the inquiry and determine whether anyone should be prosecuted.

The 356-page report, prepared by the department’s inspector general and its Office of Professional Responsibility, provides the fullest picture to date of an episode that opened the Bush administration up to charges of politicizing the justice system. The firings of nine federal prosecutors, and the Congressional hearings they generated, ultimately led to the resignation of Attorney General Alberto Gonzales last September.

The investigation, which uncovered White House e-mail messages not previously made public, offered a blistering critique of Mr. Gonzales’s management of the department. It called Mr. Gonzales “remarkably unengaged” in overseeing an unprecedented personnel review, and said that he “abdicated” his administrative responsibilities, leaving those duties to his chief of staff. It said that the process for deciding which prosecutors were fired was “fundamentally flawed.”


Mr. Mukasey, in announcing the appointment of an in-house prosecutor to continue the investigation, acknowledged that the process for firing the prosecutors was “haphazard, arbitrary and unprofessional, and that the way in which the Justice Department handled those removals and the resulting public controversy was profoundly lacking.”

One of the most controversial firings is of David Iglesias, who was hassled by Republicans over a case involving corruption charges against a Democrat. A review of his book notes that Iglesias was "talented, Hispanic, evangelical, a military veteran and a loyal Bush supporter... [In his book,] Iglesias claims shocking attempts to "co-opt the Justice Department for political ends" with statements that as early as 2003, U.S. Attorneys were being pressured to purge Democrats from voter rolls wherever possible; Iglesias says he was thrown under the bus after refusing to release sealed details of an ongoing prosecution that would scandalize Democratic contenders in a local 2006 race. Iglesias's text, like his testimony before the Senate Judiciary Committee, implicates a number of big dogs, including Gonzales and Karl Rove, as well as the President."

CIA Top Administrator Pleads Guilty to Fraud

According to the Washington Post ("Ex-CIA Official Pleads Guilty to Fraud, 30 Sept 2008, A2):

The CIA's former top administrator pleaded guilty yesterday to steering agency contracts to a defense contractor and concealing their relationship, making Kyle "Dusty" Foggo the highest-ranking member of a federal intelligence or law enforcement agency to be convicted of a crime, officials said.

Foggo, 53, admitted that he conspired to defraud the government through his relationship with Brent R. Wilkes, a California businessman and close friend. Prosecutors said Wilkes took Foggo and his family on a $30,000 Hawaiian vacation and courted the CIA official with expensive meals throughout the Washington area...

In return, court documents say, Foggo helped Wilkes get lucrative contracts, including one in which the CIA paid 60 percent more than it should have for water a Wilkes-affiliated company supplied to CIA outposts in Afghanistan and Iraq.

Foggo, a longtime logistics officer, was the CIA's executive director from November 2004 until May 2006, holding the agency's third-ranking position and one in which he oversaw the CIA's daily operations and budget. The position, which has since been eliminated, was sometimes referred to as "Mayor of the CIA." Foggo was accused of using his seniority and influence at a prior CIA job in Europe to help Wilkes. It is one of the first cases that has involved the CIA's clandestine operations in Europe and the Middle East.

Although Foggo, a Vienna resident, pleaded guilty to one count of wire fraud in U.S. District Court in Alexandria, prosecutors agreed to dismiss 27 other counts against him and to recommend a sentence of no more than 37 months in prison. Judge James C. Cacheris, after accepting Foggo's plea, took the unusual step of telling Foggo that his attorneys "have done a good job for you in this case." Under federal law, Foggo could receive a prison term of as much as 20 years when he is sentenced Jan. 8.

Violations reported at 94% of Nursing Homes

The NY Times reports that: 

More than 90 percent of nursing homes were cited for violations of federal health and safety standards last year, and for-profit homes were more likely to have problems than other types of nursing homes, federal investigators say in a report issued on Monday.

About 17 percent of nursing homes had deficiencies that caused “actual harm or immediate jeopardy” to patients, said the report, by Daniel R. Levinson, the inspector general of the Department of Health and Human Services. Problems included infected bedsores, medication mix-ups, poor nutrition, and abuse and neglect of patients.

The inspector general said 94 percent of for-profit nursing homes were cited for deficiencies last year, compared with 88 percent of nonprofit homes and 91 percent of government homes.

Full report of the inspector general (pdf)

related:  What Are We Going to Do With Dad? [Geriatrician Jerald Winakur looks at the "vast inland sea of elders" that is building and wonders where the doctors will come from to care for them. Writing as the son of an eighty-six-year-old man with dementia, Winakur also details the nitty-gritty of caring for an increasingly debilitated parent. In both of his roles—loving son and highly skilled professional—he is hard pressed to alter a course that punishes his dad and tears at his family.]

Bottled Water: Commercial Use of Public Good

The Washington Post reports (Bottled Water at Issue in Great Lakes, 29 Sept 2008, A7) about a loophole in the campaign to stop the wholesale export of Great Lakes water:

A provision of the Great Lakes Compact allows water to be diverted from the basin if it is in containers holding less than 5.7 gallons. The question is whether bottling water from the aquifers that feed the lakes, the largest repository of fresh water on Earth, should be seen as ordinary human consumption, commercial production, or export of a treasured natural resource. 


opponents of bottled water say soda and beer are different because the water is consumed in making something else, whereas they view Nestle as taking a public good, paying very little for it, and making a profit on it.

They also fear that since the compact officially treats water as a "product," the door could be opened to further commercialization and sale. It was such fears that in 1998 launched the process that led to the compact, after the tiny company Nova Group obtained a permit from the Ontario government -- later withdrawn -- to ship up to 158 million gallons of Great Lakes water per year to Asia.

33 Pastors Flout Tax Law With Political Sermons

Churches, like many other organizations, receive tax emptions so long as they do not endorse candidates. I think this makes sense because if tax exempy organizations can endorse candidates, then people will set up nonprofits for the purpose of politics and undercut all our campaign finance laws. So I'd see this as white collar crime, although the pastors and religious groups see this as a govt crime - denying them free speech. (They can still say what they want; they just don't get a tax break.)

From the Washington Post

Johnson and 32 other pastors across the country set out Sunday to break the rules, hoping to generate a legal battle that will prompt federal courts to throw out a 54-year-old ban on political endorsements by tax-exempt houses of worship. The ministers contend they have a constitutional right to advise their worshipers how to vote.


Each campaign season brings allegations that a member of the clergy has crossed a line set out in a 1954 amendment to the tax code that says nonprofit, tax-exempt entities may not "participate in, or intervene in . . . any political campaign on behalf of any candidate for public office." 

This time, the church action is concerted. Yet while the ministers say the rules stifle religious expression, their opponents contend that the tax laws are essential to protect the separation of church and state. They say political speech should not be supported by a tax break for the churches or the worshipers who are contributing to a political cause.

In an open letter Saturday, a United Church of Christ minister, the Rev. Eric Williams, warned that many members of the clergy are "exchanging their historic religious authority for a fleeting promise of political power," to the detriment of their churches.

"The role of the church -- of congregation, synagogue, temple and mosque -- and of its religious leaders is to stand apart from government, to prophetically speak truth to power," Williams wrote, "and to encourage a national dialogue that transcends the divisiveness of electoral politics and preserves for every citizen our 'first liberty.' "


"I have no objections to clergy taking off their robes and walking out the door of their church, synagogue or mosque and immersing themselves in political campaigns," said Rabbi Jack Moline of Agudas Achim Congregation in Alexandria, chairman of the Interfaith Alliance board. "But a sanctuary should not be a place of political agitation on behalf of a candidate. On behalf of issues, yes. Of candidates, no." 

"Pirates" ??

I'll admit I don't know enough to say who is on the right end of this story, but present it as an example of we should be careful about definitions of crime and criminals. The reports are of "Somali priates" hijacking a ship full of tanks an arms, which would seem to be white collar crime.  A later story claimed the pirates had no idea what the ship was carrying when they seized it. According to an interview,

He said that so far, in the eyes of the world, the pirates had been misunderstood. “We don’t consider ourselves sea bandits,” he said. “We consider sea bandits those who illegally fish in our seas and dump waste in our seas and carry weapons in our seas. We are simply patrolling our seas. Think of us like a coast guard.”

The piracy industry started about 10 to 15 years ago, Somali officials said, as a response to illegal fishing. Somalia’s central government imploded in 1991, casting the country into chaos. With no patrols along the shoreline, Somalia’s tuna-rich waters were soon plundered by commercial fishing fleets from around the world. Somali fishermen armed themselves and turned into vigilantes by confronting illegal fishing boats and demanding that they pay a tax.

“From there, they got greedy,” said Mohamed Osman Aden, a Somali diplomat in Kenya. “They starting attacking everyone.” By the early 2000s, many of the fishermen had traded in their nets for machine guns and were hijacking any vessel they could catch: sailboat, oil tanker, United Nations-chartered food ship.

“It’s true that the pirates started to defend the fishing business,” Mr. Mohamed said. “And illegal fishing is a real problem for us. But this does not justify these boys to now act like guardians. They are criminals. The world must help us crack down on them.”

related: profile of Henry Okah (global guerrilas):  Henry, energized by the grinding poverty he saw when he visited his family's ancestral village in the Delta, sought to reverse this flow: away from the capital and the oil companies and into the hands of the people of the Delta. However, in order to do this, Henry had to innovate with warfare.

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