TPM News

Was Madoff just the tip of the iceberg?

The SEC is investigating at least one case in which investors may have been cheated out of as much as $1 billion, by money managers using tactics similar to those alleged to have been employed by Madoff, Bloomberg reports, based on anonymous sources "with knowledge of the inquiries."

It adds:

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators had tried as recently as last month to bring in more investors.

And it throws in an additional nugget of news stemming from Madoff's providing a list of his assets to the SEC on Wednesday:
A catalog of Madoff's assets provided by his attorneys to the SEC on Dec. 31 hasn't revealed any major sources of additional cash, a person familiar with the matter said.

The New York Times has gone through President Bush's latest round of pardons and commutations, issued on December 23rd, and found some interesting new nuggets.

We already knew about the case of Isaac Toussie, the New York real estate crook whose pardon was revoked after it emerged that his father was a major Bush donor.

But the Times adds to that the story of Reed Prior, an Iowan serving a life sentence for a drug conviction.

Prior's previous applications for clemency, including one filed as recently as December 2007, were rejected. But this year, Prior's lawyer asked Iowa governor Chet Culver (whose wife he happened to know) to call White House counsel Fred Fielding and schedule a meeting about the application. Culver did so. After meeting with Prior's lawyer, Fielding recommended granting the application, which President Bush then did.

And here's another case of what looks like special treatment:

Alan S. Maiss, once president of Bally Gaming Inc., was convicted in 1995 in a case related to a video-poker scandal in Louisiana. In seeking a pardon, Mr. Maiss was represented by H. Christopher Bartolomucci, an associate White House counsel from 2001 to 2003.

Mr. Maiss applied on Dec. 26, 2007, far later than most of the other pardon recipients. A Justice Department spokeswoman, Laura Sweeney, said Mr. Maiss did not get through quickly because of special treatment. Ms. Sweeney noted that two others who were granted pardons in December had applied recently -- in August 2007 and February 2008.

But Douglas A. Berman, a criminal law professor at Ohio State University, and a clemency consultant, said "there's no doubt" that Mr. Maiss had received fast-track treatment.

Mr. Bartolomucci, who has several other clemency clients, said he visited the White House in August 2008, "hand-delivered the materials that had already gone to the Justice Department," and "took a few minutes" to talk with the associate counsel who handles pardons, Kenneth Lee, about Mr. Maiss's case.

"His application was granted because of its considerable merits," Mr. Bartolomucci said.

Leaving aside the merits or lack thereof of these particular cases, the larger problem here is the simple fact that these backdoor routes aren't open to the great majority of people.

Karen Orehowsky, described as a volunteer clemency consultant who advised Mr. Prior's commutation team, tells the Times:
It takes a 'Hail Mary' from people who have a lot of connections and who are willing to put their neck out for people they care about, and it's unfair to people who don't have those connections.

Seems about right.

So, how much are the four firms hired to manage the Fed's mortgage-backed securities purchase program getting paid for their work, and how did they get the contracts in the first place?

They're not saying.

We called Blackrock Inc., Goldman Sachs, Wellington Management, and PIMCO to ask them about their recently announced contracts to manage a total of $500 billion worth of mortgage-backed securities, on behalf of the Federal Reserve. Spokespeople for the first three firms told us they were referring all questions to the Fed. Representatives for PIMCO -- whose founder said in September that his firm would manage a very similar Treasury program for free, out of patriotic duty -- have not responded to two messages.

A spokesman for the New York Fed told TPMmuckraker he'd get back to us with more information.

"The selection of these managers seems incredibly opaque," Jeffrey Gundlach, the chief investment officer for the invesment firm TCW, and an expert in mortgage-backed securities, told TPMmuckraker.

Indeed, the Fed has so far provided little detailed information on the process by which these firms were selected. In a fact sheet posted on their website, the Fed wrote:

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian ... The selection criteria were based on the institution's operational capacity, size, overall experience in the MBS market and a competitive fee structure.

We'll keep you posted on what we learn from the Fed...

Attorney General Michael Mukasey released a legal opinion saying that interviews between Vice President Dick Cheney and the FBI regarding the Valerie Plame affair will remain confidential. Mukasey cited a concern that releasing the interviews would discourage White House officials from participating in future interviews. Cheney reportedly asked his deputy, Lewis Libby, to reveal Plame's name to a reporter. (Legal Times)

Roland Burris, Governor Rod Blagojevich's pick to replace President-elect Obama in the Senate, once sought the death penalty for a man wrongly accused of murder. As Illinois Attorney General in 1992, Burris continued the prosecution of a man charged with rape and murder despite a confession from another man and the objections of his top prosecutors. (ProPublica)

A response from the Treasury Department to questions posed in a COP report last month acknowledges that it is hard to estimate the specific impact of TARP funds, but that they are helping ease credit markets. The response notes that credit default swaps between banks have gone down 240 basis points and that much bailout money has yet to make it into the financial system. (Portfolio)

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The Hill reports today:

Despite keeping Defense Secretary Robert Gates in the Pentagon, President-elect Obama's transition team informed 90 Bush appointees their services will not be needed after Inauguration Day.

It's worth pointing out that another roughly 160 political appointees were kept on. But here at TPMmuckraker, we were more interested in what came next.

The paper reported that, in response to the Obama team's move, Jim O'Beirne, the special assistant to the secretary of defense for White House liaisons, sent an email to the dismissed DOD staffers, in which he suggested that they were being removed by political opponents as a result of their effectiveness in carrying out Bush administration policies.

Reports The Hill:
In the email, O'Beirne tried to assure the soon-to-be displaced employees that the decisions were based on "policy change in the Obama administration" and not based on performance.

However, he said, if employees "harbor residual doubts" then they can "content yourself with the likelihood that it was your outstanding performance as a Bush appointee that drew the opposition's attention to you."

"In that regard, you may take justifiable satisfaction that you were among the first to be chosen," O'Beirne wrote.

Now, this way of thinking -- that being removed by "the opposition" (that is, the man who'll be our president) is a badge of honor, because it shows that you were committed to implementing the policies of the previous president -- is misguided coming from anyone.

But The Hill doesn't note that in the case of O'Beirne, a longtime GOP operative who's married to the conservative commentator Kate O'Beirne, it's perhaps not surprising. Consider this excerpt from a Washington Post story from 2006:
After the fall of Saddam Hussein's government in April 2003, the opportunity to participate in the U.S.-led effort to reconstruct Iraq attracted all manner of Americans -- restless professionals, Arabic-speaking academics, development specialists and war-zone adventurers. But before they could go to Baghdad, they had to get past Jim O'Beirne's office in the Pentagon. To pass muster with O'Beirne, a political appointee who screens prospective political appointees for Defense Department posts, applicants didn't need to be experts in the Middle East or in post-conflict reconstruction. What seemed most important was loyalty to the Bush administration. O'Beirne's staff posed blunt questions to some candidates about domestic politics: Did you vote for George W. Bush in 2000? Do you support the way the president is fighting the war on terror? Two people who sought jobs with the U.S. occupation authority said they were even asked their views on Roe v. Wade.

In other words, O'Beirne led the disastrous process in which key posts in the Coalition Provisional Authority were given to Heritage Foundation research assistants who knew nothing about Iraq but were loyal to the GOP. And we all know how that turned out.

So perhaps it's to be expected that O'Beirne would continue to see government only through the prism of politics. Still, it's an outlook that's rarely expressed so crassly.

Thanks to reader W.M. for the tip.

Earlier this month, as we noted at the time, the congressional oversight panel for the financial bailout released a report on how the Treasury is spending the $700 billion in taxpayer money Congress gave them.

In its report, the panel, chaired by Harvard Law professor Elizabeth Warren, asked several basic questions about the Treasury's activities, for which it had not yet been given enough information to provide conclusions. These included "What is Treasury's Strategy?" "Is the Strategy Working?" And "What Have Financial Institutions Done with the Taxpayers' Money?"

Now -- not coincidentally, at a time when most people are distracted by thoughts of cheap champagne and off-key singing -- the Treasury has responded.

The 13-page riposte is, by and large, an impressive example of using up white space while saying absolutely nothing. But a few excerpts stand out as noteworthy.

First of all, in response to Warren's question of whether the strategy is working to stabilize markets, Treasury says, in part:

Treasury is also monitoring the effects our strategy is having on lending, although it is important to note that nearly half the money allocated to the Capital Purchase Program has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. Clearly this capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence - both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended. The increased lending that is vital to our economy will not materialize as fast as anyone would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.

In other words, we originally said this whole bailout was necessary to increase lending, and it hasn't. But it still might "as confidence returns." (The fact that the bailout was supposed to be a key part of restoring confidence doesn't seem to have been considered.)

But now look at this: A few pages later, Treasury responds in part to Warren's question of what the banks are doing with the bailout money by essentially cutting and pasting the very same paragraph:
The CPP began in October 2008 and the money must work its way into the system before it can have the desired effect. Moreover, we are still at a point of low confidence - both due to the credit crisis and due to the economic downturn, during which lending and borrowing levels normally drop. While confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, we expect to see more credit extended. This lending won't materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks.

Look closely at those two blockquoted paragraphs. It genuinely looks like someone has gone through the second one and altered a few phrases -- "as long as confidence remains low" becomes "while confidence is low" -- so that it's not a word for word replica of the first.

This isn't just an issue of shoddy writing, or even lazy thinking. It suggests that Treasury was so stumped by Warren's question of what banks are doing with the bailout money that it resorted to copying passages from earlier in the report -- passages that have little direct relevance to the question -- to pad out its answer and obscure the fact that it has no idea.

It comes closest to answering the question in this passage, in which it essentially throws up its hands and confesses ignorance:
As the GAO noted in its report, given the number and variety of financial stability actions being put in place by multiple entities, it will be challenging to view the impact of the Capital Purchase Program in isolation and at the institutional level. Moreover, each individual financial institution's circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization.

And as for why Treasury hasn't insisted on more reforms from participating banks:
The CPP is a voluntary program for viable institutions. The program was designed to be attractive to financial institutions of all sizes as a mechanism to increase capital in the financial system while also protecting the taxpayer.

In other words, banks wouldn't have done it if they'd had to agree to more regulation. And we didn't want to make them.

Warren's panel is still slated to release a second report on the Treasury's handling of the bailout money -- though whether it will decide that Treasury has adequately responded to the issues raised in its first remains to be seen.

Over at TPM, we noted earlier today the news that the Federal Reserve has hired four investment firms -- BlackRock, Goldman Sachs, PIMCO and Wellington Management Company -- to manage its mortgage-backed securities purchase program, in which it will buy up $500 billion worth of mortgage bonds, in an effort to boost the housing market.

It'd be nice to know more about why all of these companies were selected, and how much they're being paid -- and we've put those questions to the Fed. But for a number of reasons, one of the four firms, bond giant PIMCO, stands out as a particularly interesting choice.

As of June 30th, 61 percent of PIMCO's holdings -- $500 billion -- were in the very mortgage backed securities that it's now being hired by the Fed to buy back on behalf of US taxpayers, according to a September Bloomberg report that cited data on PIMCO's own website.

That could explain why, as financial blogger Rolfe Winkler pointed out earlier today, PIMCO chief Bill Gross was sounding the alarm in early September about the disastrous fate that would befall the US economy unless the government started buying up troubled mortgage assets.

In a September 4 post on PIMCO's website, Gross warned:

If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.

Within days, the Treasury had done what Gross was asking. In other words, as Peter Cohan, a professor of management at Babson College, put it at the time in a post on
Bill Gross, who manages $830 billion, has convinced the U.S. Treasury to use your taxpayer dollars to bail him out of his bad investments.

And Gross seems to have had his eye on the endgame for a while here too. Later that month, he argued in a Washington Post oped that a broader bailout -- what became the TARP -- was also desperately needed, and he seemed to suggest that his own PIMCO would be a perfect candidate to manage the funds.

He wrote (via nexis):
Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. (itals ours)

PIMCO, or the Pacific Investment Management Company, is based in Newport Beach, California.

In an interview shortly afterwards with CNBC's Erin Burnett, Gross presented his willingness to take on that job as a patriotic stand, pledging that PIMCO would work for no fee, "if everybody else worked on the same basis." (It's around the 4:25 mark).

And now the Fed has given him what's essentially the same job.

Will Gross stand by his pledge to work for free? We've called PIMCO to ask, and will keep you posted on what we found out. But given how Gross has made out so far, we're not holding our breath.

US Attorney Patrick Fitzgerald has asked for a 90-day extension to bring an indictment against Illinois governor Rod Blagojevich.

In a motion filed today in U.S. District Court, Fitzgerald said that the length, scope, and complexity of the investigation, combined with the intrusion of the holiday season, has prevented him from meeting the January 7 deadline. The probe, writes the prosecutor, began in 2003 and "involves multiple potential defendants" and thousands of intercepted phone calls.

The move means that we likely won't learn much more from Fitzgerald about Blagojevich's alleged crimes until at least March. So speculation is likely to continue.

We'll have the motion for you soon...

Late Update: Here it is.

Promising "the most substantial rewrite of the laws governing the U.S. financial markets since the Great Depression," a Congressional committee has released a list of witnesses that it has called for hearings on the Bernard Madoff scandal, starting this Monday. And the makeup of the list suggests that lawmakers are serious about getting to the bottom of the Madoff matter, and preventing a repeat.

According to a press release, Rep. Paul Kanjorski will call the following witnesses before the House Financial Services committee:

- Mr. H. David Kotz, Inspector General, U.S. Securities and Exchange Commission - Mr. Stephen P. Harbeck, President, Securities Investor Protection Corporation - Mr. Harry Markopolos, an independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise, as well as a Chartered - Financial Analyst and Certified Fraud Examiner - Mr. Allan Goldstein, a retiree and investor with Bernard L. Madoff Investment Securities - Ms. Tamar Frankel, Professor of Law and Michaels Faculty Research Scholar, Boston University School of Law - Mr. Leon Metzger, adjunct faculty member at Columbia University, Cornell University, New York University, and Yale University

There are a number of interesting things here....

As SEC IG, Kotz is, at the request of the agency's chair Chris Cox, looking into how the SEC missed an alleged fraud of Madoff's size, during several investigations into his business over the last decade. So the invitation to Kotz to testify suggests that Kanjorski and his colleagues will focus in part on fixing the SEC's myriad problems.

The SIPC is a federal fund created to cover fraud losses in brokerage accounts, which is preparing to compensate Madoff investors. So the inclusion of its president, Stephen Harbeck, suggests the committee will also focus on the pressing question of which of Madoff's alleged victims will be made whole -- an issue that currently remains opaque. That impression is reinforced by the inclusion of a Madoff investor, Allan Goldstein, on the list.

But the name Harry Markopolos may stand out the most. It was Markopolos, then a rival broker, who first argued, in a detailed complaint to the SEC, that Madoff's returns were too consistently high to have been achieved honestly. His testimony could provide some preliminary insight into how Madoff set up a system that deceived investors and regulators for so long.

We'll bring you all the news from the hearings next week...

Rep. Charles Rangel (D-NY) used campaign funds to pay parking tickets in the Washington, D.C. area, according to campaign finance records. Although it is not illegal to use campaign funds to pay off tickets written during campaign activities, it is still not clear if all $1,540 in fines were accrued during campaigns. (Congressional Quarterly)

An FBI probe into Rep. Tim Mahoney (D-FL) has begun and will investigate whether the outgoing congressman is guilty of any wrongdoing for placing his then-mistress on the congressional payroll. Mahoney insists that he did nothing illegal. (ABC News)

California Attorney General Jerry Brown is suing the Bush administration in order to block midnight regulations that would curtail protections put in place by the Endangered Species Act. The new rules would, among other things, allow federal agencies to issue permits for mining and logging operations without the consultation of biologists. (Associated Press)

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