ethics

Lyric Hughes Hale: Why the Bankers Aren’t In Jail

by on December 12, 2011

Huffington Post…

“The secret of a great success for which you are at a loss to account is a crime that has never been discovered, because it was properly executed.” Balzac, Le Père Goriot Conversely, when execution is faulty and failure occurs, crimes are exposed, and an effort to apportion blame and punishment is launched by the guilty and innocent alike. This is an apt description of what happened when Bernard Madoff’s investment firm collapsed. As long as high returns were being generated, no one wanted to ask questions, including the obvious “isn’t this too good to be true?” When the music stopped and markets tanked, the entire scheme collapsed. Make no mistake: if his investments had continued to do well, Madoff would be in business today. But they didn’t and he is now in jail, and at least four suicides, including his own son’s, have been attributed to his crimes. Mr Madoff doesn’t seem sorry for the risks he took, but certainly, he is suffering. Partial restitution has been made to his victims. There are certainly those who feel that although the regulators failed to prevent, the justice system was able to punish. The same applies in the Enron case. This contrasts with the frequent refrain–why haven’t more bankers gone to jail as a result of the global financial crisis? This has become a key demand of the Occupy Wall Street movement. The CBS news program 60 Minutes recently had a widely viewed and quoted segment that tried to answer this question, targeting Countrywide in particular. Many explanations have been offered, depending on your location within the political spectrum: the cause of judicial inaction is corruption, undue influence, the ability of the wealthy to hire the best attorneys, or simply that it is hard to convict people for making bad investment decisions in a free market environment. Those who are most indignant point to the widely quoted number that more than 1,000 bankers were imprisoned as a result of the Savings & Loan Crisis of the 1980′s. The true number was 582, as reported by UPI in back in 1992, but that was still high in terms of the relative economic effect at the time: The Justice Department said Monday it has charged more than 1,100 people so far in nearly four years of prosecuting the multibillion-dollar savings and loan scandal, winning 905 convictions but less than half a billion dollars in restitution. The department, in a release containing statistical information about the major savings and loan prosecutions, said 905 of 1,188 people charged in the scandal had been convicted in cases between Oct. 1, 1988, and June 30, 1992. Only 71 defendants were acquitted. The cases prosecuted represented $8.3 billion in losses to the thrifts. Of the 750 cases in which sentences have been handed down, judges imposed $11.2 million in fines and ordered $439 million in restitution. They ordered prison terms for 582 defendants but let off 168 without jail time. Among those charged, 137 were chief executive officers, board chairmen or presidents of savings and loan institutions. Of the high-level executives charged, 102 were convicted and 10 were acquitted. Only $8.3B in losses–that certainly seems small beer by today’s standards. Based upon 582 convictions, this represents a ratio of one jail term per $14.3M in losses. In his article in Foreign Affairs , Roger Altman estimated US losses as a result of the financial crisis to be $8.3 trillion. So add three zeros, and the number of people going to jail now at this loss-to-conviction ratio would be 582,000. Literally, half a million people! One-third by the way, would be high-level executives. California prisons are currently so full that they are turning out convicted criminals–where would we put all these people, and what would it cost to incarcerate them? To say nothing of the fact that we don’t have enough prosecutors. The FBI has also decreased, not increased their manpower dedicated to white-collar crime since 2001, as priorities shifted to counterterrorism after 9/11. The truth is that historically economic crimes, however they are defined, are not usually punished that severely even if they are uncovered; the S&L crisis was an anomaly. Not many of the tulip speculators ended up in jail, mostly it was the poorer blokes at the end of the chain who were thrown into debtors’ prison. Another view: Economic crimes beyond stealing physical property aren’t easy to discover, expose, define and differentiate from the normal market activity of selling something for more than it was bought. As Gary Becker, the University of Chicago economist explains his theory, “I was not sympathetic to the assumption that criminals had radically different motivations from everyone else.” This ambivalence is true even in dealings between states under conditions of war and economic dictatorship. At the Nuremberg trials after the end of World War II, the industrialists who served the Third Reich by building gas chambers and weapons got off lightly compared with the likes of Adolph Eichmann. Alfried Krupp for example, one of a small group of businessmen who went on trial, was given the most severe punishment, and he went to prison for just 12 years. Krupp’s firm lives on of course, as do the Japanese companies that built the weaponry of the Pacific–Mitsubishi is a name that has survived and thrived. One interpretation is that under the circumstances of war, or in times of financial distress, it is not possible or advisable to dismantle the infrastructure that holds a country together. This was certainly a tenet of US post-war reconstruction policy. A popular view is that the lack of prosecution is the result of a lack of regulation , and there are now calls for new banking and financial industry legislation. However, this might just be the worst prescription possible. The real problem was lack of care in the enforcement process, as well as poorly written laws, according to Carole Basri, a legal ethicist and contributor to What’s Next? She makes this point in her chapter ‘The Future of Corporate Compliance’: The future of compliance lies in the shadow of the global financial crisis of 2008. Predictably, demands for greater regulation immediately followed the crisis. However, we do not need more regulations that will create more administration and more extensive compliance programs. We need better-targeted regulations that are consistently enforced, that foster corporate integrity, and that streamline the compliance process. Reductions in the number of compliance officers and of the funding of compliance programs will be counterproductive, yet this is precisely what is happening today. Ms Basri’s view is that ethics must be part of the ‘compliance cocktail’ and that ethics can be promulgated at an institutional level. All of this will require a more global outlook in order to be effective in the vast new marketplace for financial services in particular. This presupposes that people are motivated not just by greed, but also by doing the right thing professionally and as human beings, if given a chance. Which all harks back to the work of Adam Smith, especially The Theory of Moral Sentiments and the importance of values-based governance. Another way of looking at this problem is from a revolutionary point of view. Financial crises can be seen as either the cause or the effect of political unrest, leading to what can be dispassionately described as a redistribution of wealth. The French Revolution was seen as a time of swift judgment against the wealthy, but in fact, economic crimes were not a focus at all: The ultimate weapon in the war against the rich was, of course, the scaffold. In a period at which economic mechanisms were so unregulated that a large part of the population depended for their survival upon the black market, it was no longer possible to put a number to those guilty of a breach of the laws in force. Therefore sentences for economic crimes were relatively scarce . To be more precise, recent studies suggest that the Revolutionary Tribunal had pronounced 267 sentences of this sort, 181 of which were for hoarding or for failure to respect the maximum, and eighty-six for passing counterfeit money or for trading in assignats.” – The French Revolution, An Economic Interpretation by Florin Aftalion Disclosure is another critical issue that prevents a judgment of fraud. Many of the banks fully disclosed risks in the endless paperwork that accompanied both mortgages and mortgage-backed securities sales. The problem was that all of this was so difficult to understand that even Alan Greenspan, a math whiz, did not understand the risks. The Wall Street Journal recently reported that the Justice Department has concluded that criminal convictions might be difficult to obtain, and therefore it is doing the next best thing, which is offloading these cases to the regulatory authorities for possible civil penalties. Again, the upshot is no jail time. Indeed, cases against Countrywide, AIG, Citibank, Washington Mutual, and Goldman Sachs have gone nowhere. Loren Steffy, business commentator for the Houston Chronicle , also addresses this question: Three years ago, I asked Sam Buell, the former federal prosecutor in the government’s effort to indict Enron’s Jeff Skilling, the question of whether we’d see widespread prosecutions from the financial crisis. His prediction: Don’t count on it . As I wrote at the time: In the current crisis, few people understood the complex debt instruments that had become common on Wall Street and therefore the firms failed to make good risk assessments. But what they were doing — such as packaging dodgy mortgages into investment pools that were supposed to minimize risk — was widely known. ” It’s not a conspiracy if everybody’s in on it ,” Buell said. “In order to have a fraud conspiracy you’ve got to have some effort by one group to deceived another group.” But what about the fact that America as whole seems deceived by what happened? Doesn’t matter, Buell argues. Just because Main Street didn’t understand what was happening doesn’t make it a fraud. Those who are stand-ins for investor interest — regulators, brokers, credit agencies — “seem to have known what was going on,” he said. So the reasons that there aren’t any trophy heads are plentiful: there are legal obstacles, practical obstacles, a lack of personnel, and general fuzziness about how economic crimes are defined. Convictions were high as a result of the S&L crisis, but it can be argued that few lessons were learned and a new banking crisis was not prevented as a result of vigorous prosecution. Still, it is early days, and political pressures are mounting. Surely prosecutors somewhere are carefully preparing their cases against high-profile bankers, just as legislators are drafting new regulations. Will any of this help the current situation or prevent another crisis? Most likely, no. But sometimes hungry crowds demand that heads must roll. This post originally appeared at the Yale Books blog . What’s Next? Unconventional Wisdom on the Future of the World Economy by David Hale and Lyric Hale is available now from Yale University Press.

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Lyric Hughes Hale: Why the Bankers Aren’t In Jail

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E. Henry Schoenberger: Occupy Greed: Occupy Congress for a New Path: The Doctrine of Fairness: It’s Time!

by on November 21, 2011

Huffington Post…

What is Occupy? A new movement symbolizing the rising awareness of unfairness, and the lack of positive change? A protest? A tide of unrest stemming from decades of unraveling barriers against greed and the economic theories bereft of any concern for the common good? It’s all of these, based on anger from palpable feelings of betrayal and the empirical evidence that Wall Street has profited (risen) from the ashes of the American Dream: our Government let this happen. The intellect and steadfastness of purpose behind all the individuals that have joined together in this collective effort to reclaim their right to share in the American Dream is not going away. Unions have been here before. And now almost 50 percent fewer Americans live in middleclass neighborhoods. In 1948, Hubert Humphrey, in an impassioned speech , said the Civil Rights Movement was a response to 172 years of inequality and its time had come. In 1964, as Lyndon Johnson’s Vice President, he helped push the Civil Rights Act through Congress. Now there is a movement against greed. Greed has been a driving force of humanity from the beginning of history, just like man’s enslavement of his fellow man; which can well be considered a function of greed. Slavery obviated the need for cheap labor and shipping jobs offshore — again, a practice based on greed. Unbridled greed is not concerned with morality or any public good. There so many diverse manifestations of greed in our society which have been assiduously cultured by the greediest as a generation of “depression psychosis” (J. K. Galbraith) dissipated in the aftermath of the Great Depression. And this rebirth of unfettered Greed has once again laid to waste our economy and, increasingly, our society. However, today greed has become so widespread that the fight against it often polarizes into individual issues that lead to a lot of isolated shouting — thereby allowing the root cause to become obscured. Instead, we hear so much about the parts — parts that have not been tied together to be able to see the whole — the whole truth. Think about all the parts: Congress divided into vectors, left and right; raters who committed fraud and have the chutzpah to rate the United States; the Supreme Court standing up for corporations — when the Bill of Rights and the Constitution were written to protect the people; the Fourth Estate is supposed to objectively create informed public opinion, but when it is objective the “fair and balanced” buffoons yell liberal and worse names; tax laws favoring the ultra rich; subsidies for the most profitable corporations the world has ever seen — Big Oil; the SEC protects its rules but does not enforce regulations; the Fed does not enforce regulations regarding the issuance of “complex securities that must be explained to be understood” –yet Alan Greenspan admitted that in all honesty he could not explain the financial instruments, “too complex to understand;” and the Fed has its own power of attorney to do what it chooses with the U.S. Treasury printing presses; support for public education has been devalued and privatizing has customarily not provided a better format; Congress, after attacking the wrong country, goes to war in Afghanistan — a graveyard full of all the failed countries who were there in the past; health carriers, in an oligopolistic/monopolistic industry, do whatever they see best for their own bottom line, and the Sherman Act was defused decades ago when there was real competition from hundreds of health carriers; jobs shipped offshore and profits parked off shore; Wall Street mega-bank holding companies having their own way no matter what; and capitalism along with government are viewed as culprits, and not as essential elements to our Democracy that have gone awry. While Congress has cried UNCLE to get enough money to run campaigns to get elected and stay elected, it seems — so have presidents. How long will it take to coalesce the collective spirit of Occupy into a movement based on the Doctrine of Fairness to restore Government and Capitalism to a force for the beneficial interests of our society? Adam Smith believed that one byproduct of Capitalism would be for the “beneficial interest of society.” How long will it take more of the 99 percent to comprehend that they share some responsibility for allowing greed to flourish and take what it can from the society it needs to survive? We desperately need the right conversation in this country. A new dialogue of public understanding about what has really happened and that all the unfettered greed and lies must be stopped. We are awash in a sea of greed caused by the deregulation and devaluation of ethics. And unless we recognize and acknowledge: the return of Social Darwinism — reborn as Financial Darwinism — has infected our society with a toxic virus resulting in the largest percentage of people living in poverty in the United States in our recorded history; the highest level of people without full-time or any jobs since the Great Depression; the existence of most favoritism ever accorded to banks – we will not cure Wall Street Flu. The past ought to serve as prologue. We know what to do. So why are people willing to sleep outside in parks, in cities all over our country and the world? Why is there a generation of young adults (many are our own children) who have borrowed money to go to school who feel betrayed by government support for greed and not for education? Think about how our government has funded banks that charge exorbitant interest rates on student loans — and consider the government has not charged banks interest on the funds they loan to students! What could we do with the billions of annual subsidies given to Big Oil — why can’t Congress give it to students? Proposals to rectify student loans have been tepid at best. Financial reform is reform in name only, and banks have not been reined in. These are high-profile problems — inequalities — that continue. Why is there a vast tide of unrest sweeping our country and so many Americans from all age groups and economic backgrounds who have now joined this protest? It is simple, because of the fundamental unfairness and lack of the application of available solutions. Congressional Republicans have not brought the Jobs bill out of committee for a vote. Angry? So what is the movement about, why are there protests? Why are people willing to sleep in streets outside in lousy weather? Because they care, they care about a better country and a fairer playing field; and they feel betrayed. They (the 99 percent) are victims in the 30-Year War Against the American Dream — a dream they have been swindled out of. Keep in mind swindlers do not care about their victims. Our government does not get it yet. Democrats cannot just promise change and hope, and Tea Partiers and Republicans may have more in common with Occupy than they care to imagine. So now is the time to coalesce for the common good. Now is the time to fight to establish The Doctrine of Fairness. E. Henry Schoenberger is the author of How We Got Swindled by Wall Street Godfathers, Greed & Financial Darwinism ~ The 30-Year War Against the American Dream. To learn more; www.howwegotswindled.com.

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Obama’s Latest Executive Order

November 9, 2011

WASHINGTON — President Barack Obama is coming out against swag. That’s swag, as in the coffee mugs, pens, T-shirts and other public relations articles that federal government agencies purchase with taxpayer money to promote their work. The swag ban is part of an executive order the president will sign on Wednesday to cut waste and make government more efficient. Obama has been using his executive powers on modest proposals to promote job creation, assist homeowners and consumers, or alleviate spending. Besides putting an end to the promotional gear, the new order directs agencies to reduce travel spending, cut back on cellphones and laptops issued to employees, cut down the size of the executive vehicle fleet and post documents online instead of printing them – measures that individually would hardly merit a White House news release. The administration’s goal is to cut spending by 20 percent in areas covered by the executive order. “We’re cutting what we don’t need so that we can invest in what we do need,” Obama said in a statement. The president was expected to make brief remarks on the administrative action Wednesday after signing the executive order in the Oval Office. The White House on Wednesday also plans to announce four finalists in a cost-saving contest among federal government employees. One finalist suggested the creation of a tool “lending library,” another proposed ending the purchase of U.S. code books that are already available online. Among examples cited by the White House of cost-cutting already under way are the Internal Revenue Service’s plan to cut 27 percent of its travel costs by relying more on teleconferences and webinars and the Homeland Security Department’s decision to conduct annual audits to reduce the number of unused cellphones and air cards. At the Commerce Department, the White House said, the agency has reduced the number of fleet drivers to one for all top departmental officials, including for new Secretary John Bryson.

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Patricia Harned: After the Debacle: How News Corp Can Rebuild Trust

July 25, 2011

NewsCorp executive and scion James Murdoch, the man who oversaw the News of the World ( NOTW ), said the leadership of the now shuttered British tabloid “failed to get to the bottom of repeated wrongdoing that occurred without conscience or legitimate purpose.” But many wonder, amid a parade of arrests and revelation, whether the phone hacking and bribery at NOTW are truly the actions of one NewsCorp enterprise or an example of the company’s overall corporate culture. Events to date demonstrate that even experienced messengers, like those at NewsCorp, can struggle when the spotlight turns on them. This is why a recent report by the Ethics Resource Center’s Fellows program — Accepting Responsibility Responsibly: Corporate Response in Times of Crisis — advised Boards to put a crisis plan in place before disaster strikes. But for the Murdochs and their executive team, the time for planning ahead has passed. Now investigators, elected officials, and the general public rightfully want to know why the families of murder victims and soldiers were targeted by hackers. However contrite or creative its explanations for past acts, this is the time for NewsCorp to build a new corporate conscience. NewsCorp is now literally fighting for its life. The best defense, as we have seen with companies that have survived such crises, is not to spin its story, but to start writing a new one. But when asked by Members of Parliament if editors at other NewsCorp operations were reviewing their newsrooms to insure NOTW -type tactics were not being replicated, Rupert Murdoch answered “No, but I am more than prepared to do so.” The future of NewsCorp depends on just how prepared Mr. Murdoch really is. That review is just as critical as any other measure to NewsCorp uses to restore its name. To address the growing perception this problem reaches well beyond one paper, the company must revisit and reassert its corporate values. NewsCorp must spell out for every employee the core belief, from its very own standards of conduct that “Compliance with the law is crucial to the reputation of NewsCorp and its business units.” The challenge is making clear those are not just words on a page. NewsCorp must go beyond the newsroom, and into the boardroom, to create real reform. Our research suggests that NewsCorp can restore its good standing by embracing some cornerstone measures: Publicly reaffirm the primacy of its “Standards of Business Conduct” as the foundation for employee conduct all the way to the Executive Suite and provide employees. Live up to them. Set a tone at the top that consistently reinforces these values through both words and deeds. Tell employees, shareholders, and customers how company standards are guiding your decisions during this crisis. Hold accountable individuals at every level of the organization who have violated standards of professional conduct. Employees need to see that your company will conduct a fair investigation to identify the individuals who have been involved in this scandal. Renew attention to organizational culture and root out mixed messages or subtle signals that might open the door to misconduct. Not only can such measures restore public respect, but our 2009 National Business Ethics Survey® found that good conduct becomes self-reinforcing. In a strong ethical culture where employees are more committed to the company, workplace misconduct can be reduced by as much as 50%. Full-page newspaper ads and even personal apologies to the victims of this scandal look impressive. But post-recession consumers, who are more aware of the character of a parent company than ever before, are unlikely to be persuaded by gestures. Real recovery for NewsCorp will take time, discipline, and a concrete, top down commitment to ethical business conduct. Patricia J. Harned is President of ERC, which recently published Accepting Responsibility Responsibly, a report on how ethical values can guide an organization through crisis.

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Bob Beaty: Would You Pay For It?

June 2, 2011

One of the characteristics of toiling in obscurity is the limited shelf life. No sentient being, or company for that matter, can stand anonymity for long. Fortunately, there are three solutions; pray for a miracle, change the perception or shuffle off this mortal coil. In the case of most SmallCap companies, the equivalent of the third eventuality would be to shut the doors. Let’s deal with door number two — change the perception — as the most viable, since miracles only happen infrequently and, dare I say, in obscurity. Other than a fraternity party I attended many years ago in Ithaca, New York, but I digress. Let’s talk fee-based research. Rough segue, but an extremely interesting topic. If you were/are the CEO of a SmallCap company whose stock couldn’t get attention if you yelled ‘open bar’ at an investor conference in Vegas, then you need to familiarize yourself with the genre. As do investors. Once you understand how it works, it amazes me that anyone depends at all on the affectations and frequent conflicts of interest of ‘traditional’ investment dealer research. Begin with the premise that your corporate story or vision is worth telling, which doesn’t include you 40-something game developers eating hot pockets in mom’s basement. The hell of it is, there are some great stories out there: Lifesaving biotech stories, the next Microsoft (or Apple) or a killer electronic device or cost-saving service. If you can objectively conclude the world needs to know, or alternatively hire someone to tell you it has legs, it probably should gain exposure. And inform potential investors. But how do you get noticed? Fee-based research is a viable arrow in the overall IR quiver. I gained some good insight chatting to independent analyst Patrick Murphy, CFA, and principal of www.MurphyAnalytics.com. Some interesting observations: • SmallCaps tend to commission fee-based research when times for the company are good and want those facts disseminated to investors • Disclosures on the report are key. Investors must satisfy themselves that the analyst’s compensation is fully disclosed as well as their ethics • CFA’s are held to very high standards and having that designation ups the independence and credibility of the work • No matter how informational and conflict-free the report, it must be used a one of many research tools. Never make an investment decision based on one report • If a report is too promotional or draws unrealistic conclusions and/or price targets, it should likely be ignored • The majority of fee-based research shops do not take shares as compensation, thereby negating a vested or conflicted interest in the market performance of the shares • The research should work for the investor, not the company In the majority of cases, the company does not see — if the report contains one — the analyst’s price target or rating until publication. The reason is to maintain the independence of the report and not allow the company to exert any influence on the projected price. The company always has the right to spike the report if it feels there are problems, but since investors will never know, the point is moot. The main enigma for investors is that fee-based research is likely going to be positive. A company facing bankruptcy or some other calamity is not going to bring attention to it. Plus, it likely doesn’t have the money to pay for a report. I don’t see this issue as a problem, based on the fact that if these reports are used first and foremost as information sources, the investor takeaway is an in-depth history of the company, good rundown of the financials, comparison to the metrics of peers and a sense of future direction. Analysts, especially those with CFA designations, are not in the habit of making stuff up. The numbers are the numbers and all those used for the report are already freely available to the public. Investors should never confuse a positive tone with a flattering or pandering one; alarm bells should sound if the tenor of the report is overtly gushy. Compared to Wall Street, or traditional investment sealer research, fee-based reports give — or should — a clear picture of all compensation. ‘Traditional’ research rarely does this and while I draw no conclusions as to why, wouldn’t an investor just rather know? All a reputable fee-based analyst receives is a disclosed cash payment. No soft dollar arrangements, no investment banking relationships and no axe to grind. For my money, or rather a SmallCap company’s money, that seems a good deal for all involved.

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Ethics Concerns At SEC May Undermine Funding Bid

March 11, 2011

As the SEC publicly campaigns for increased funding, chairwoman Mary Schapiro is facing new criticism over the appointment of a key agency official whose family has ties to Bernie Madoff’s Ponzi scheme. Earlier this week, the New York Times reported that attention has turned to the appointment of David M. Becker, who was the SEC’s general council from February 2009 until last month. Becker was appointed to the position even though Schapiro and the agency knew that Becker’s mother had invested with Bernie Madoff. Veterans of the SEC, however, are divided on whether or not Schapiro or the agency did anything wrong. For her part, in a Congressional hearing Thursday, Schapiro admitted that the agency mishandled Becker’s latest SEC tenure. (Becker previously served as SEC General Counsel from January 2000 to May 2002.) “While Mr. Becker did solicit and follow advice from the ethics counsel, I realize in light of this incident that as chairman I have to ensure that we go beyond what may be required in any particular situation,” Ms. Schapiro said . At the SEC, Becker’s work involved helping to decide how Madoff’s victims would be compensated, according to the New York Times . Becker’s late mother invested money with Madoff, and Becker and two of his brothers inherited the investment and its earnings. The money was withdrawn well before the Ponzi scheme was discovered. “How could anyone have missed this?” said Steve Thel, professor of securities regulation at Fordham University, who previously worked as a lawyer in the General Council’s office at the SEC. “It almost has to have been that they did this by mistake. Because it’s so clear that this would create problems if anyone knew about it. I don’t think anything we know about Becker indicates he did this to protect his own pocket. I think that people didn’t think enough about ethics violations.” But in former SEC chairman Harvey Pitt’s view the matter is, in a sense, “much ado about nothing.” “Before Becker was hired he disclosed this issue,” Pitt said. “When issues relating to Madoff arose both he and the chairman did what they should, they went to the ethics councilor to find out what they thought.” “I think that ethical issues are very, very important but this is pretty much a tempest in a teapot if you will,” Pitt continued. “And what I’m worried about is that there are those whose agendas involve basically criticizing the SEC and whatever it does or doesn’t do. And my fear is that whatever anybody’s view on the merits of this [appointment] was, there are real and important issues the SEC is grappling with, and I don’t think this deserves to be at the center of another storm.” Schapiro testified before two congressional hearings on Thursday — one focussed on Becker and the other on the SEC’s bid for a large funding increase to meet the new financial regulations set by the Dodd-Frank Act. Critics, pointing to the failure of the agency to detect the Madoff fraud, are saying Becker’s work at the SEC is further proof of the agency’s incompetence. Becker’s financial ties were not publicly disclosed until Irving Picard, the court-appointed trustee charged with recovering assets for Madoff’s victims, sued the three Becker brothers to recover $1.5 million of the $2 million they had inherited in 2004. Becker and Schapiro both say that Becker’s work at the SEC only went forward on advice from the SEC’s ethics counsel. “Even if they did go through the ethics processes, the ethics processes are then problematic,” said Thel. “If someone could come to the conclusion that this is not problematic — that is problematic.” Bloomberg reports that Becker has said he consulted with the ethics counsel at least twice about work related to Madoff. One specific matter — and the biggest apparent conflict of interest — concerns the amount of money Madoff victims would be compensated. The NYT reports that while the agency had agreed to a deal that would return to investors only the money they had originally put into their accounts with Madoff, Becker said the commission should allow victims to keep some of the gains their investment had generated as well. That change would benefit Becker’s family. In May 2009, Becker went to the ethics counsel again to ensure proper conduct over the Madoff fallout. Bloomberg reports that Becker wrote in a letter to U.S. House Republicans that the counsel “concluded that a reasonable person with knowledge of all of these facts would not question my impartiality.” “That’s a strained conclusion,” said Steve Thel. “To say that Becker’s participation in the decision in the clawback would not have a direct and predictable effect is very problematic.” Furthermore, Thel pointed out, it is not merely a matter of hindsight. Everything that is troubling about Becker’s appointment was known at the time he was hired. Becker has said that his departure from the agency last month is not connected with Picard’s lawsuit. “The problem, the horrible black eye,” Thel said, “is that now the SEC has given people who are simply critics of regulation and the [Obama] administration a way to criticize the SEC and bring up again the Madoff failings which largely all predate the Schapiro administration.” Rep. Randy Neugebauer (R – Texas) said earlier this week that people from both parties agree there was at least an appearance of a conflict of interest, according to Reuters . House and Senate Republicans, along with the SEC’s top watchdog, are investigating Becker’s role at the SEC.

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David Isenberg: The Known and Unknown Contractor

February 10, 2011

It is not a secret that as Secretary of Defense during the presidency of George W. Bush Donald Rumsfeld was sympathetic to using private military contractors. In 2003, he said that as many as 320,000 jobs filled by military personnel could be turned over to civilians. Ironically, long before Abu Ghraib, Defense Secretary Rumsfeld was preaching the virtues of using contractors in prisons. The secretary said at a town hall meeting in August 2003 that the Army pays $20,000 to $40,000 to hold a prisoner each year, whereas it costs Kansas only $14,000 per year. “I don’t think of running a prison as a core competency of the United States military,” he said In September 2004 he told the Senate Armed Services Committee that he had identified more than 50,000 positions now filled by uniformed personnel “doing what are essentially nonmilitary jobs.” At the same time, he said, the Army was so short-handed it had to call up tens of thousands of reservists to fight in Iraq. Rumsfeld said he intended to assign the troops to military jobs and hire civilian workers or contractors to take the non-military jobs. “We plan to carry this conversion out at a rate of about 10,000 positions per year,” Rumsfeld told the committee Now, thanks to his just published memoir, ” Known and Unknown ” we have a few more examples of his view on contractors. As part of the book’s promotional effort for the book Rumsfled created a website , where he has posted hundreds of documents from his files. If you search them using the “contractor” keyword you get things like the following 25. 2004-03-30 to (no recipient) re (no subject) Category: George W Bush Secretary of Defense (21) – 2004 – Snowflakes New pay schedules, so that US SOF don’t get enticed out to the CIA or to private contractors at much higher salaries than we are currently able to pay them. One might recall that PMC advocates have claimed that this was an overblown concern but evidently it was serious enough to get Rumsfeld’s attention Then, there was this, which is actually pretty sensible and uncontroversial. TO: Honorable Andrew Card FROM: Donald Rumsfeld SUBJECT: Military Detailees March 28, 200l lo:28 Andy, are you going to take a look sometime at the way the demand for members of the armed services in the total White House complex has ballooned’? 1 am told it has gone from 1,400 to 2,100. 1 don’t know from when, or whether that figure is accurate, but it is worth checking. We might want to think about ways that that number can be cut down and possibly ways more could be reimbursable, rather than non-reimbursable. Also, it may make sense to replace some functions now performed by uniformed military personnel with contract employees, as WC are doing at the Pentagon. For example, mess attendants for U.S. forces in Bosnia are provided by an outside contractor, not by soldiers. Let me know what you think. Thanks. I WlR:dh 03270 l-24 And, proving that Eisenhower’s famed military-industrial complex is now more properly accurately described as a military-industrial-congressional complex, is this: 2001-02-22 Re Ethics Laws Category: George W Bush Secretary of Defense (21) – 2001 – Snowflakes … of the new Congressional ethics laws that apply to the Executive Branch is that the contractor community has to be very careful about dealing with the Executive Branch, but they … February 22, 2001 9:08 PM SUBJECT: Ethics Laws One of the side effects of the new Congressional ethics laws that apply to the Executive Branch is that the contractor community has to be very careful about dealing with the Executive Branch, but they don’t have to be careful about dealing with the Congress. As a result, since I was last here, there has been a process taking place that has knitted the defense contractor community to the Congress with an unfortunate effect on the defense establishment. Finally, there was this. If Rumsfeld has bothered to look at how this training has actually turned out he is probably feeling embarrassed. Contractors such as DynCorp and others have been heavily involved in this and have received loads of criticism for their efforts. 2. 2002-04-23 to Gen Franks re Contractors Category: George W Bush Secretary of Defense (21) – 2002 – Snowflakes … 2002-04-23 to Gen Franks re Contractors … April 23, 2002 6:30 PM TO: Gen. Franks CC: Gen. Myers FROM: Donald Rumsfeld SUBJECT: Contractors Have you thought of using contractors to train the Afghan army? Thanks. DHR:dh 042302-24

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Watchdog Claims Conspiracy Driving Rules On For-Profit Colleges

January 20, 2011

A Washington advocacy group is claiming that Wall Street investors have conspired with the Department of Education to craft rules that would damage for-profit colleges to drive down their stock prices and allow short-sellers to profit. The as-yet unsubstantiated conspiracy theory — advanced in a press release Wednesday — underscores the intensity of the campaign by for-profit colleges to derail proposed federal rules that could tighten their access to federal aid dollars. The new rules come in response to a growing body of evidence that for-profit colleges such as the University of Phoenix and Kaplan University have left graduates suffering under debts they cannot repay given the meager wages they typically earn. In the press release, the self-described watchdog, Citizens for Responsibility and Ethics in Washington (CREW), portrays the rule-making as little more than a ploy aimed at driving down stock prices of the publicly-traded companies that operate for-profit colleges so that savvy short sellers can cash in. “Wall Street investors have been working with high-ranking education officials to craft regulations, allowing them to net millions of dollars through the short sale of for-profit college stocks,” declares the press release. When pressed for evidence of this conspiracy, the group’s executive director, Melanie Sloan, cited e-mails that did little more than establish that department of education officials have met with one prominent short seller, Steve Eisman, who Michael Lewis profiled in his best-selling book The Big Short . In recent months, Eisman has emerged as a strident critic of the for-profit college industry, asserting that it fleeces taxpayers and preys on students. Asked to explain how a meeting between the government agency and a critic of the for-profit industry amounts to proof of a conspiracy, Sloan said only that Eisman was unfit to offer advice on the subject. “They should be cautious, given that Eisman was making money on the market fluctuations,” she said, referring to the profits he garnered by betting against mortgages. Eisman declined to comment. A Department of Education spokesman dismissed the allegations as “patently ridiculous,” adding that officials gather information from a wide range of sources in drafting all regulations, including members of the for-profit sector. Stocks of companies that own for-profit colleges have indeed dropped significantly over the past year in anticipation of the Department of Education’s new rules, and after public statements made by Eisman. Another major trigger for plummeting stocks was the release of a Government Accountability Office report last year that found widespread fraud in recruitment practices at several for-profit colleges. None of the e-mails referenced by the group indicate that Eisman’s sentiments played any role in shaping the rules being crafted. CREW describes itself as a “non-profit legal watchdog group dedicated to holding public officials accountable for their actions.” But the group’s executive director, Sloan, had planned to join a prominent Washington lobbying firm that represents the for-profit college industry, Lanny J. Davis and Associates. Davis has been in the center of a bruising battle over new rules that could restrict the for-profit college sector’s access to federal student aid money, the lifeblood of the industry. Davis has become a lighting rod in Washington for his paid representation of highly controversial figures, among them the Ivory Coast dictator Laurent Gbagbo. A press release announcing Sloan’s hire last November quoted Davis saying he was “thrilled” by the addition to his team. But Sloan said Wednesday she plans to remain at CREW indefinitely and has no ties to Davis. She did not explain the discrepancy between her statement and the press release. “I think I am being clear,” she maintained. “I don’t work with the coalition or Lanny Davis.” Davis said Sloan might yet join his firm, though the timetable is “still uncertain.” He added that she would not be working on for-profit college rules regardless. Davis’ most recent lobbying disclosure form lists only two clients for the firm, the Coalition for Educational Success and Martek Biosciences Corporation. Both the Coalition for Educational Success, the trade group represented by Davis, and CREW have sued the Department of Education, seeking documents and correspondence that policymakers had in the lead-up to the development of the new regulations for the for-profit sector. The regulations aim to curb some of the more controversial trends for the for-profit education sector, including high student loan default rates and excessive burdens of debt compared to the salaries students attain after graduation. The for-profit education industry has waged an extensive advertising and e-mail campaign against the so-called “gainful employment” rules being considered by the Education Department, arguing that the rules would limit low-income students’ access to college and would hold for-profit schools to a different standard than public or private non-profit colleges. Davis and Sloan have frequently assailed statements made by Eisman, the Wall Street short seller who famously bet against the subprime mortgage market and has since turned his attention to what he portrays as predatory recruitment and financial practices by for-profit colleges. At industry conferences and in testimony before the Senate, Eisman has excoriated the for-profit sector for vacuuming up federal student aid, leaving students with excessive debt burdens. In a speech made at an investment conference last May, Eisman likened for-profit colleges to subprime mortgage lenders. “Are we going to do this all over again?” he asked. “We just loaded up one generation of Americans with mortgage debt they can’t afford to pay back. Are we going to load up a new generation with student loan debt they can never afford to pay back?” CREW claims that Eisman’s depictions are not motivated by civic interest, but rather personal investor gain. His mere meeting with Department of Education officials crafting the new rules amounts to proof of an improper proceeding, the group claims. “Education officials knowingly allowed that process to be tainted by the undisclosed role of short-sellers, seeking to use the regulatory arena to manipulate the financial markets and drive down the share value of for-profit education companies, all for their own personal gain,” declares a letter CREW sent Wednesday to Education Secretary Arne Duncan. The letter asks that Duncan investigate the matter.

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Dov Seidman: Ethical Leadership: An Operating Manual

December 23, 2010

The demand for ethical leadership is growing, yet the supply remains low, as evidenced by the recent credit crisis that sparked the worst global recession since the 1930s. The rising generation of leaders appears equipped merely to navigate rather than to guide. Navigating describes how we naturally react and adapt to an interconnected world while guiding refers to how we forge a sustainable path and build endeavors of sustainable value in an ethically interdependent world. Fortunately, prototypes of ethical leaders exist, thanks in part to professor Elie Wiesel, the Nobel Peace Prize winner whose work through the Elie Wiesel Foundation for Humanity has been churning out models of 21st century leadership for more than 20 years. Before I say more about Wiesel’s organization, I want to talk about ethical leadership. In response to the financial crisis, many leaders are rethinking notions about the source of competitive advantage, which increasingly comes from how we behave rather than what we produce. We are rethinking how we lead, by placing less emphasis on carrots and sticks and more on inspiration, and putting humanity at the center of our organizations. These efforts, if they are to succeed, require ethical leadership, which inspires the behaviors in people necessary to create competitive advantage. Ethical leaders distinguish themselves by doing that which is inconvenient, unpopular, and even temporarily unprofitable in the service of long-term health and value. They view the world as interconnected and develop multidisciplinary solutions to address complex problems that crop up every day. Rather than automatically extending payment terms to a supplier during economic busts, for example, ethical leaders consider the financial stability of the supplier, potential negative impacts to the supplier (as well as to the supplier’s employees and its suppliers-and to the company itself) if payment terms are elongated. Ethical leaders also consider other solutions (e.g., sharing best practices with suppliers) that may require an investment but generate more value over the long term. Ethical leaders extend trust to their workers, creating the conditions necessary to empower employees, suppliers, and even customers to take the risks necessary to create game-changing innovations. The Ritz-Carlton’s leadership team allows each employee to spend up to $2,000 to address customer issues at his or her own discretion (an example I will expand upon in my next column). What’s more, ethical leadership is a renewable human resource and, for this reason, represents one of the most efficient and practical assets an organization can put to use. Essay Competition The hopeful news is that exemplars of ethical leadership exist today. For the past 20 years the Elie Wiesel Foundation has awarded its Prize in Ethics , a competition that rewards college students in the U.S. for viewing human endeavor through an ethical lens. The best of their essays are featured in a new book, “Ethical Compass: Coming of Age in the 21st Century” (Yale University Press). Wiesel created the contest to connect with people at the most formative time of their lives. My company, LRN, is the foundation’s exclusive corporate sponsor of the prize. We joined together because we shared a belief that to solve some of the world’s biggest problems, we need to help young people embrace a new perspective for being “other regarding.” The prize is designed to help future leaders develop the skills needed to become great human beings (or guides) and not just “human doings” (or navigators). And the foundation has “quietly operated as an incubator of talent and innovation that would rival Google, Intel and any other Silicon Valley company,” New York Times columnist Thomas Friedman notes in the book’s foreword. “But unlike the technology icons pumping out next-generation hardware and software, for the past twenty years, Professor Wiesel has been hard at work trying to improve our human operating system by inspiring the next generation of ethical leaders.” Ethical Voices Here is how the future of ethical leadership looks. “One should not ask, ‘Is this the wrong thing to do?’ ” writes 1997 Prize in Ethics winner Mark Reed, “but, ‘Is it the right thing to do?’ ” By asking the first question, people immediately turn to policies and rules, and then venture no further. They adhere to the rule, fudge it, or simply ignore it. The second question carries a challenge with the potential to fuel great innovation. If this is not the right thing to do, what other process, product, idea, relationship, or people might we tap to achieve this same objective? In her effort, 1992 winner Kimlyn Bender examines the metaphorical “masks” we humans use to free ourselves from an innate drive to behave ethically in order to commit immoral acts. “The challenge of ethics today,” she writes, “is to focus not on the masks, but on the individuals behind them and to reawaken within the individual a renewed sensitivity to the moral conscience, bringing every area of life and action under its guidance.” Zohar Atkins, who won in 2009, frames our responsibility as global citizens. “We are responsible both for being who we are and becoming who we ought to be,” Atkins writes. “Our challenge takes many forms: … to philosophize, question, and critique, and to act, answer, and take a stand.” How do we execute our mission? “The answer is love,” Atkins argues. “… for to love is to say: ‘I am not the master of the world. I am incomplete, in need of another.’ ” We are “in need of another” because our decisions and actions affect so many others in our interconnected world. Hence we need future leaders who are “other regarding,” as Wiesel puts it. In his foreword, he asks, “Have we taught [young people] to develop an ethical compass within?” The 2007 winner, Magogodi Makhene, makes this argument in more compelling terms when she writes, “My humanity is inextricably linked to yours and unless I acknowledge your humanity in defining my own, I will never realize the highest summits of human experience.” Makhene was writing about her “tear-gassed childhood” in South Africa during the last throes of apartheid. However, her insights can be applied to the decision-making process nearly every 21st century leader conducts. No country, company, or individual will scale the summits of human endeavor unless we recognize our inextricable and moral interconnectedness to the rest of humanity and start behaving, and leading, in what Elie Wiesel describes as a “society yearning for guidance and eager to hear ethical voices.” * This story appeared in, and was written for, Bloomberg Businessweek .

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David Isenberg: A Rose by any Other Name Would Smell Like a "New Humanitarian"

November 29, 2010

Remember when in February 2009 Blackwater changed its name to Xe Services? Didn’t do much good, did it? Almost everyone still thinks of it as Blackwater, or shades of the other Prince, the PSC formerly known as Blackwater. It just goes to show you that not every attempt at rebranding works well. Sometimes, in fact, they are major disasters. For example, if the SciFi Channel had done more due diligence before it rolled out its new name it would have discovered that, in most parts of the world, “syfy” is a slang term for syphilis. And being associated with a sexually transmitted disease is never a good marketing tactic. Of course, rebranding is par for the course for private military and security contractors. The public debate is frequently shallow and sensationalist, and often outright demagogic, so it is hardly surprising that PMSC seek to change the terms of the debate, considering that its critics often seek to influence it by using inaccurate terminology like “mercenary, “dogs of war,” or “guns for hire.” Remember that the PMSC trade group, the International Peace Operations Association, which then changed its name to simply IPOA, recently renamed itself the International Stability Operations Association. I see the change as an attempt to broaden their market appeal. Offering an organization that is of use to companies that can lay claim to helping establish stability will, at least potentially, cast a far wider net, that just those involved in peace operations. As both a marketing move and an attempt to attract future member companies it is a smart move. The sad thing is that for many years PMSC have been notably bad at doing public relations, or, if you want to use military terminology, information operations. Partly it was because in their early years PMSC were, and to some degree, still are headed by former military officers whose initial reaction to the idea of talking with the media is to echo the famous comment, “Off with their heads!” from the Queen of Hearts in Alice in Wonderland. Another reason is that they were simply too cheap to pay for a fulltime public relations person or office. And when you are something on the order of DynCorp or KBR you definitely need a whole office. Or to paraphrase the old sports quote, image isn’t everything; it’s the only thing. Given that PMSC trade association have lobbied Congress to consider “best value” when awarding contracts, which involves weighing a company’s reputation among other factors, and not just its bid price, you can see why this is important. So, how’s that whole identity politics thing working out? This brings us to another paper presented at the presented at the SGIR 7th Pan-European International Relations Conference, in Stockholm, Sweden, September 9-11, 2010. This is ” New Humanitarians? Private Military and Security Companies ” by Jutta Joachim & Andrea Schneiker of the Institute of Political Science at Leibniz University Hannover, Germany. They start with the obvious, “Although Private Military and Security Companies (PMSCs) are gaining increasingly in importance, they still suffer from an image problem… Companies are therefore interested in presenting themselves as legitimate and acceptable contract parties.” And what do they find? Based on a discourse analysis of the homepages of select PMSCs and the industry association International Peace Operations Association (IPOA), we examine the ways in which they respond to negative labels. Drawing on the framing literature, we find that PMSCs present themselves as “new humanitarians.” Not only do they provide increasingly logistics or security for the staff of humanitarian organizations which are confronted with complex emergencies and ever-more dangerous missions, but the respective companies also appropriate the discourses of these organizations. The growing involvement of actors interested exclusively in profit is not without problems. Not only does it challenge the monopoly thus far enjoyed by non-profit organizations with respect to humanitarian assistance and the principles which guide their actions, but it contributes further to the normalization of privatized security. “Armed humanitarians” is also the title of Nathan Hodge’s book which I wrote about previously . Of course, such a rebranding has impact beyond that of image. It goes to furthering the legitimacy and staying power of the PMC industry. After all, who could possibly be against a humanitarian?. It would be like being against the Red Cross or Amnesty International. For PMSCs to present themselves as humanitarians has implications that go far beyond the humanitarian sector. It contributes to the normalization and power of PMSCs. By presenting themselves as do-gooders and others, including state militaries, international organizations, such as the United Nations, and even NGOs as incapable and less caring for the well-being of others, PMSCs enhance their legitimacy. Outsourcing of military and security-related tasks may, in turn, be more acceptable, easier to justify, and more difficult to resist, if not to say a moral obligation. In the view of the authors defining oneself as a humanitarian, which is generally considered to be an ethic of kindness, benevolence and sympathy extended universally and impartially to all human beings, is also smart business: In the case of PMSCs, presenting themselves as humanitarians may enhance their common acceptance and increase their pool of clients, such as NGOs, who might be less apprehensive in relying on their services, as the Chairman of the Board of Directors of RA International, a member company of the IPOA, explains: One should never underestimate the power of private companies who offer aid. Companies are almost always focused on efficiency, good negotiation, building their reputation (their brand) and getting things done on time and on budget. The basic rules of capitalism that work for the good of the communities they aid can in turn aid them in business and ultimately help post-conflict societies to recover and progress. So, in this view, someone like Adam Smith is really Mother Theresa in drag. And, as it turns out, for one of the few times in their history, PMSC are becoming rather deft and adroit in their public relations. PMSCs increasingly refer to themselves as “the New Humanitarian Agent[s]” emphasizing, like AECOM, that they “are committed … to make the world a better place”. Their humanitarian identity has evolved over time in response to scandals and crisis in the industry and is reflective of the post-Cold War kind in terms of the professed ambitions. Most indicative of a change in the industry is the way in which the IPOA more recently refers to it. PMSCs, according to the association, belong to the “Peace and Stability Operations Industry” of which the private security industry is only a “subset.” … The Journal of International Peace Operations of the IPOA is quite telling in this respect. Ads of companies quite frequently show sad looking girls (EODT), babies being fed (Blackwater), boys laughing and waving at one (IPOA), soldiers rescuing little kids (IPOA), or a globe (Blackwater, IPOA). Everyone is entitled to their own spin and it is true that in many cases PMSC are just as capable, if not more so that their traditional NGO counterparts such as Oxfam, Doctors Without Borders or the Red Cross. So, should we care whether IPOA et al is putting itself in the ranks of Nobel Peace prize winners? Well, the authors note a few problems. First, there is what we might politely call the hypocrisy factor: Analyzing the homepages of PMSCs and one of their associations–the IPOA–provides evidence that companies present themselves increasingly as “new humanitarians” interested in addressing the root causes of conflicts. On the one hand, they employ naming strategies, emphasizing their commitment to humanitarian aims and ethics. On the other hand, however, they paradoxically blame while at the same time align themselves with other humanitarian actors. As much as they consider the reluctance of Western states, international organizations, and NGOs to intervene in ongoing crisis as a problem, PMSCs also seek to benefit from and rent their legitimacy. Second, is the conflict of interest issue: First, PMSCs specialize in intelligence and risk assessments. In terms of effectiveness and efficiency, this may be an asset in situations of violent conflicts or humanitarian disasters and a comparative advantage vis-à-vis NGOs or international organizations. Given the kinds of information PMSCs can produce and have available, they may be in a better position to determine where help is most needed, coordinate the assistance and the logistics, or to estimate the effort or the danger involved. From a moral point of view, however, this capability can be problematic. Through their advice, PMSCs may shape and influence our understanding as to what constitutes a humanitarian crisis, who are the victims and who may deserve aid, and who is qualified to assist. Instead of political or humanitarian motives per se, the information companies provide is based on economic reasoning. Whether to intervene or not and offer assistance is, hence, no longer a question of duty or a certain ethics, but one of whether a crisis promises to be a lucrative market. Third, is the commitment issue: Similar to NGOs, most PMSCs operate transnationally and conceive of themselves as apolitical, neutral actors. Again, based on the criteria of efficiency and effectiveness, this makes their involvement appealing. Companies can be at site in a relatively short amount of time, are not be held back by cumbersome political debates, and may enjoy greater acceptance because they are not directly associated with the UN or any particular state. Judged in moral terms, however, their constitution may again be a problem. Compared to states, UN agencies or even NGOs which often have ties to countries other than those established during violent conflicts or natural disasters, companies do not have these kinds of relations. Consequently, they may feel less of a commitment beyond their assignment and ignore the long-term implications of their engagement or even the short-term consequences for ongoing conflicts. If problems arise, they may simply leave and set up shop elsewhere. While some might argue that the exit option is also available to NGOs, the implications are different for them than for PMSCs. Contrary to the former, which are forced to reflect whether their behaviour is in line with their ethics and are held accountable by their members and donors, companies, in comparison, evaluate their actions based on profits and the potential responses of their share-holders. And last, but hardly least: Finally, apart from moral concerns or those related to efficiency and effectiveness, there seems to be a further implication that has to be considered when PMSCs acquire a humanitarian identity. It contributes to their normalization and may, in the long-run, undermine the role of more traditional actors in the field. With PMSCs gaining in acceptance and legitimacy, international organizations and NGOs may either be increasingly be perceived as lacking the ability to take care of those in most need or may even feel less compelled to intervene.

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IMSA President & CEO Steps Down

October 29, 2010

BETHESDA, MD–(Marketwire – October 29, 2010) –  The Insurance Marketplace Standards Association (IMSA) today announced that its President and CEO, Brian K. Atchinson, will depart on November 1st. Atchinson’s leave was first announced in September when the IMSA Board of Directors recommended that the membership dissolve IMSA and create a new voice for compliance and ethics in life insurance by forming The Compliance and Ethics Forum for Life Insurers (CEFLI).

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Elizabeth Warren Was Paid To Be An Expert Witness In Cases Against Bailed-Out Banks

September 28, 2010

While acting as a government-appointed bailout watchdog, Elizabeth Warren, whom President Obama appointed this month to lead the creation of the Consumer Financial Protection Bureau , served as an expert witness in cases against some of the big banks receiving aid from the Troubled Asset Relief Program, Bloomberg News reports. Warren was paid $90,000 to be an expert witness in a class-action lawsuit at the same time she was head of the Congressional Oversight Panel , which oversees the $700 billion government bailout of the financial sector. Bank of America, Citigroup and JPMorgan Chase, all of which received TARP assistance, were among the defendants in the suit, according to Bloomberg . Warren told Bloomberg that her work as a witness constituted no ethical violations, saying she had prior approval from the ethics lawyer for the Congressional Oversight Panel. A Harvard professor and an expert on the financial sector particularly as it relates to middle-class consumers, Warren said she was allowed to continue doing side jobs even as she held this government role. Warren is famously tough as advocate for the middle class, and a former student described her teaching style at Harvard as “Socratic with a machine gun.” As head of the panel overseeing TARP, she remained more skeptical than Treasury secretary Tim Geithner about whether the program had actually succeeded in ensuring that certain banks could function without government support. In appointing Warren to set up the CFPB, which she is credited with devising, the president effectively made her head of the agency, at least for now, and sidestepped what could have been a contentious confirmation hearing.

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Bianca Jagger: Let’s Save the Real Avatar

August 10, 2010

The Survival of the Kondh Tribe is Hanging in the Balance For centuries, tribal and indigenous people have been victims of exploitation, first at the hands of colonial powers and now, at the hands of powerful businessmen representing mining, oil, gas and logging companies. Their policies are implemented “in the name of progress and development” and their mantra is “maximum production” and “minimum cost.” The struggle of indigenous and tribal people versus corporations and states, over land rich in natural resources, is a global issue. The Kondh tribe’s battle to save their livelihood against British based mining company, Vedanta Resources plc, illustrates the struggle for survival that indigenous and tribal people are facing throughout the world. On July 28, I attended Vedanta’s shareholders’ meeting in London. At this year’s AGM the company’s human rights and environmental record was brought under public scrutiny by British Member of Parliament, Martin Horwood, and NGOs including Amnesty International, ActionAid, the London Mining Network, Banktrack and Survival International. During the meeting I read an impassioned plea on behalf of the Niyamgiri community to the Vedanta board, and to shareholders. I also delivered an Amnesty International petition signed by 31, 428 people urging Vedanta to halt a planned mine and refinery expansion in Orissa, India until the Dongria Kondh are fully informed and consulted. Vedanta plans to mine for bauxite – the base raw material in the production of aluminium – in the Niyamgiri Mountain, which is considered sacred by the Dongria Kondh, an endangered tribal group recognised by the Indian government as “a people requiring particular protection.” The lush forests of Niyamgiri Mountain are a pristine ecosystem of great conservation significance. The Kondh have lived in Niyamgiri long before there was a country called India or a state called Orissa. They consider the mountain to be a living God and claim that their spiritual, cultural and economic wellbeing are embedded deep within it. The proposed mine will violate the community’s rights to water, food, and health; it will displace and endanger the survival of 15,000 Kondh. For the past two years, the Bianca Jagger Human Rights Foundation (BJHRF) has spearheaded a campaign in support of the Kondh, denouncing the activities of Vedanta. In April this year I travelled to Orissa representing the BJHRF with ActionAid to meet with the Kondh communities. At every stage of my trip, at every village I visited, the communities and their leaders were eager to tell me their tragic side of the story. (Read the full story about my trip to Orissa in the Huffington Post) The messages the Dongria Kondh villagers asked me to carry back could not have been clearer: “No amount of financial reward or relocation packages can compensate for the loss of our livelihood and our sacred land”. “Please tell Vedanta that the Kondh do not want the mine to be built.” At the AGM I asked Executive Chair of Vedanta, Anil Agarwal and the Vedanta board four questions on behalf of the Kondh: 1. The conveyer belt construction has resulted in two perennial streams that we used to cultivate vegetable, cereals, pulses round the year, drying up. Tell us what will happen to the rivers and streams when Niyamgiri is mined? 2. Why are people not being compensated for the land that Vedanta has acquired forcefully? (example: Jagannathpur, Tudra Majhi, Sambru Majhi and Mala Dei villages) 3. We are suffering from TB and skin diseases because of pollution caused by your refinery. Vedanta claims to provide health care that we have not seen. Where is the healthcare that you talk about and that our people now need so desperately? 4. For generations we depended on sustainable livelihoods drawn from Niyamgiri. You are trying to destroying that. Your income generating initiatives like strawberry cultivation, leaf plate stitching using machine and phenol product have failed. You have failed to keep your promise and provide job to local tribal youths. What development do you mean – Your Profit at Our Cost? Mr Agarwal, and Non-Executive Director, Naresh Chandra, failed to address the Kondh’s questions, and responded instead with a deceptive argument. Mr Agarwal declared, Vedanta is “more concerned than anyone” about the welfare of the Kondh. He argued that malnutrition rates have fallen, and poverty has decreased since Vedanta opened its aluminium refinery in Lanjigarh, in 2006, calling it Vedanta’s “biggest achievement.” In fact, the Lanjigarh refinery has brought nothing but poverty, disease and suffering to the Kondh. The refinery has created two red mud ponds the size of several football pitches near Rengopali into which bauxite ore is washed, along with chemicals, causing toxic fumes and polluted dust. As a result, diseases affecting peoples’ lungs and eyes have become widespread: 13 people have died from TB in the last two years and 200 to 250 cattle and goats have perished. Vedanta claims that they have adequately compensated the Kondh for all land acquired and that they cannot be held responsible for the displacement of the Kondh communities. Mr Chandra argued that people were being forced out of their villages due to poverty and unemployment before Vedanta began its operations. This is in stark contrast to the testimonies given to me by the Kondh. They told me that in 2003, Vedanta had forced the community of Kinari to vacate their village, coercing farmers into selling their land for far below its market value. The few people who had titles to their land or records given by the revenue department (TATA) were promised 100,000 rupees (US $2,000) per acre. Those without titles were promised a one off settlement of 50,000 rupees (US $1,000) to give all their rights away. Worse still, those willing to give up their homes were promised up to 1,000 rupees (US $ 21). In contravention of the 5th and 6th Schedules of the Constitution of India, hundreds of people have been displaced. The top of Niyamgiri mountain, where Vedanta proposes to mine bauxite to feed the refinery that is currently poisoning the communities around Bandhaguda and Rengopali, is the source of two rivers and thirty six springs. The streams that run through the hills are the only source of water for the Kondh. The Central Empowered Committee to the Supreme Court anticipates “adverse effects of mining will affect not only bio-diversity but availability of water for the local people.” The mine will also cause increased erosion and pollution of the water systems, resulting in deteriorated water quality. In an attempt to justify Vedanta’s policies, Mr Agarwal claimed “We are bringing development to the most backward part of India…Vedanta has a long standing commitment to sustainability… an integral part of managing our operation is a commitment to health, safety, the environment and our communities.” I cannot fathom how a company that refuses to acknowledge the harmful impacts of its activities on tribal people, communities and the environment, can have the audacity to claim a commitment to sustainable development. Vedanta continues to deny all allegations of human rights violations and environmental degradation. The day before the AGM, Mr Mehta, Vedanta’s Chief Executive, refuted all claims made by human rights groups, arguing in the Financial Times, “There is no shred of truth here.” At the AGM, Mr Chandra suggested that “NGO’s, human rights and environmental organisations have based their allegations against Vedanta on misguided reports.” I asked him how twelve independent investigations, including those conducted by the UK National Contact Point for the OECD Guidelines for Multinational Enterprises, the Wildlife Institute of India, the Central Empowerment Committee to the Supreme Court, the State Pollution Control Board of Orissa, the Norwegian Council of Ethics, the Public Interest Research Centre (PIRC), the Experts in Responsible Investment Solutions (EIRIS), India’s Ministry of Environment and Forests, the India Resource Centre, Social Watch, Mines and Communities and Amnesty International, could all have found Vedanta to be violating human rights and labour rights, causing environmental damage and contravening OECD guidelines. According to the Norwegian Council of Ethics report, the company has also been accused of “repeated breaches of national environmental legislation, illegal production expansions, irresponsible handling of hazardous waste, violations against tribal peoples, deplorable wages, and dangerous working conditions in the mines and factories.” My question, like so many others at the AGM, went unanswered. Vedanta’s public relations efforts are a relentless attempt to mislead the public, with endless promises of new jobs, new roads and new facilities for local people. A glaring example is the billboard I saw on arrival at Biju Patnaik Airport, Bhubaneswar, Orissa: “Mining happiness for the people of Orissa – Vedanta.” What cruel irony. It should read, “Undermining human rights for the people of Orissa.” According to the Times of India, India is the second largest growing economy, it is the second most populated country in the world. During the last decade, India’s GDP has remained at above six percent, however, during that period the country’s Human Development Index has not improved. If India is going to assume its status with the other BRIC countries as an economic power-house, its model of ‘development’ needs to be reassessed. Development must be sustainable; it must take into account the rights and needs of local communities, indigenous and tribal people, and should benefit all sectors of society, without endangering human life or the environment. The pertinent questions of development, displacement, and livelihood, have not been at the heart of the policies implemented by the Indian states The Kondh are just one of the many tribes that have fallen victim to the so-called ‘development’ promoted by multinational companies in India. As Arundhati Roy writes, “structural adjustment, privatization and huge infrastructural projects like dams, power plants and mines have resulted in the displacement of hundreds of thousands of people.” India has one of the largest populations of internally displaced people in the world, the majority of which are Adivasis. On World Indigenous People’s Day, August 9, Adivasis from eight states protested in Delhi against the hunger, displacement and violations of rights, which have left them marginalized and disempowered. It is up to shareholders, to hold companies to account. Some prominent members of the investment community have shown their condemnation of Vedanta’s human rights and environmental record by disinvesting. Dutch pension manager PGGM sold their £11m stake in the FTSE 100 company in July, stating that its “intensive effort” to urge the company to devote greater attention to human rights and the environment had failed to have the desired effect.” This follows pull-outs on ethical grounds earlier this year by the Joseph Rowntree Charitable Trust (£1.9 million) and the Church of England (£3.8 million). Edinburgh-based investment management company Martin Currie sold its £2.3million stake in Vedanta in 2008 on ethical grounds. In 2007 the Norway pension fund withdrew its investment of $15.6 mi based on the findings of its ethics committee, which stated: “Allegations levelled at Vedanta regarding environmental damage and complicity in human rights violations, including abuse and forced eviction of tribal people, are well founded.” At the AGM, a representative from the Railways Pension Fund, said, “Vedanta could make major improvements in terms of its investor briefing sessions.” Steve Waygood, representing blue-chip City investor, Aviva voiced concern regarding Vedanta’s lack of respect for OECD guidelines, stating, Vedanta has “not engaged in the process [beside] the most cursory reply.” The Vedanta board’s response was that they were not “answerable to the British government”. Aviva voted against three resolutions at Vedanta’s meeting, regarding the annual report and accounts, the remuneration report and the reappointment of the board member who chairs the health, safety and environment committee. In an interview with Amnesty International after the meeting, Mr Waygood called the AGM “a symptom of a much deeper problem, which is that for a number of years the company hasn’t engaged with stakeholders, including minority shareholders.” He said it was “unacceptable” for Vedanta to treat the OECD guidelines with the disdain they have demonstrated. I am surprised that share-tipsters continue to recommend the company as an investment. Regrettably, many shareholders, content to read about the share price, remain silent about Vedanta’s impact on local communities. I will continue to campaign in support of the Dongria Kondh until their voices are heard. I appeal to Vedanta shareholders to take into account the plight of the Dongria Kondh, and the human rights and environmental consequences of the proposed bauxite mine, and to reconsider their investments .I urge investors to follow the example of those who have divested from Vedanta, making this year a landmark year for justice, human rights and the environment. Please sign my letter to the Chief Minister of Orissa, Naveen Patnaik, urging him to refuse permission for the mine at Bianca Jagger Kondh Campaign on Facebook For more information you can read my other articles about the Kondh: Undermining human rights The Battle with Vedanta is not over yet The Battle for Niyamgiri

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Gregory Unruh: Why Code of Ethics "Safety Valves" Are Big Mistakes

July 14, 2010

From time to time, the firm may waive certain provisions of this Code… Imagine Moses descending from Mount Sinai bearing two tablets inscribed with the 10 founding values of his people, plus a clause that says, “From time to time certain provisions such as ‘Thou shalt not murder, steal, adulter, bear false witness, etc.’ will be waived.” Last month the investment website The Motley Fool published an article entitled “Goldman Sachs: Ethics Optional” noting that Goldman and other companies such as ExxonMobil, Citigroup and Altria had waiver clauses embedded in their corporate Ethical Codes of Conduct. I recently spoke about these waivers with Kai Ryssdal on his Marketplace NPR radio show and I thought it would be worthwhile to expand on the discussion here. Waiver clauses leave the door open for companies to violate their own code of ethics if executives and the board decide it’s a “good” idea. In effect, waivers are a “code of ethics safety valve,” the metaphorical opposite of a blow-out preventer. Why have them? Waivers will just cause problems; a corporate code of ethics is created and designed to limit management decision options to only ethical choices. Usually it’s not a problem, but ethics can sometimes impinge on profits. Corporations and their shareholders don’t like to miss out on profits, so the safety valve allows them to sacrifice their ethics if the price pressure is high enough. History shows this is a bad idea. Just ask former Enron CFO Andy Fastow who is currently serving a six-year prison sentence. When the debt load on Enron’s books was impinging on profit opportunities, Fastow recommended creating off-balance sheet “special purpose entities” to acquire Enron’s bad debt. The board liked the idea. The only problem was that the Enron Code of Ethics prohibited such self-dealing by corporate officers. The solution to this ethical conflict? The board waived the code of ethics, and by doing so, set in motion the catastrophic collapse of Enron. Companies often feel compelled to have these waivers. Why? The real business world is full of corrupt political and business leaders. Those who puritanically hold on to ethics in a messy global economy are naive. While there is growing evidence that the profitability of the “when in Rome” approach to ethics is substantially overestimated , there are more important reasons to hold corporate ethics and values in higher esteem. The real reason ethics waiver clauses are a mistake has to do with the challenges of creating a culture of ethics and integrity within an organization. The modern corporate code of ethics is really a creature of legislation. The U.S. sentencing guidelines, which set out the penalties for ethical transgressions, allow companies with an ethics code and compliance program to receive a lesser sentence if convicted. In the absence of an ethical code, the court could assume the violation was willful and throw the book at them. This history means most companies have treated ethics as a compliance issue. Make sure all the t’s are crossed and i’s are dotted so we are protected when the SEC investigators raid the corporate offices. But this is a mistake. To be valuable, leaders have to make sure the code of corporate ethics is more than just words on paper. A code gains power when it becomes embodied in the corporate culture and the values of the organization. Business value and organizational strength in a culture of integrity often tie back to the principles of the company’s founders. For instance, Herman Miller’s culture of responsibility reaches back to the founder D. J. DePree. These leaders instilled a respect for corporate values that foster pride in the workforce and organizational strength in times of crises. Succeeding in business without compromising your values is hard, but eminently possible. It demands the best from company managers and proactive foresight by corporate leadership. And you don’t get this kind of dedication by embracing waivers and putting your values up for sale. Cross-posted from Forbes

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Reid Got Christmas-Eve Lift to West Coast on Feinstein Husband’s Airplane

June 17, 2010

By James Rowley June 17 (Bloomberg) — Senate Majority Leader Harry Reid hitched a ride to the West Coast on a private jet owned by Senator Dianne Feinstein ’s husband after the Senate passed a version of health-care legislation last Christmas Eve, according to Reid’s financial disclosure form. Predictions of stormy winter weather prompted the Senate to conduct an early morning vote on the bill Dec. 24 to give lawmakers as much time as possible to travel to their home states for the Christmas holidays. It was the Senate’s first Christmas Eve session held to pass legislation since 1963, according to the Senate historian’s office. Reid, a Nevada Democrat, and Senator Barbara Boxer , a California Democrat, flew to San Francisco aboard a Gulfstream jet owned by Feinstein’s husband, Richard C. Blum , chairman of Los Angeles-based CB Richard Ellis Group Inc., said Gil Duran, a spokesman for Feinstein, in an e-mail. Feinstein, a California Democrat, also was on the flight, her husband wasn’t, Duran said. Reid and Boxer reported receiving their gifts of free transportation, which they valued at $3,625, on the annual financial disclosure forms for Senate and House members that were released yesterday. Such gifts must be listed on the form. Both lawmakers stated that the flight’s value was “determined in consultation with the ethics committee staff.” Boxer, 69, chairs the Senate ethics panel. Invitation Offered As bad weather interfered with commercial air traffic to the West, Reid accepted an invitation from Feinstein, 76, to fly on the plane, said Jon Summers, a Reid spokesman. The flight left Washington immediately after the Senate vote, Summers said. A final version of the health-care overhaul measure cleared Congress in late March and was signed into law by President Barack Obama . Reid, 70, who reported a net worth of at least $1.56 million to $3.6 million, flew by commercial airliner to Reno, Nevada, where he spent Christmas with his wife, Landra, and their son’s family, Summers said. Besides chairing the Los Angeles-based real-estate services firm, Blum, 74, is chairman of Blum Capital Partners LP , an investment management firm based in San Francisco. Pelosi’s Husband In other disclosure statements released yesterday, House Speaker Nancy Pelosi reported that her husband, San Francisco real-estate investor Paul Pelosi, sold as much as $25 million of his holdings in Apple Inc. during an eight-month period when the shares almost doubled in value. He made a capital gain of between $1 million and $5 million. The closing price of Apple shares was $123.40 on April 20, 2009, the day Pelosi first sold the stock, and was $211.61 on Dec. 28, the last day he sold Apple. The speaker reported that her husband still owned as much as $5 million worth of Apple stock at year’s end. Nancy Pelosi, a California Democrat and author of “Know Your Power, A Message to America’s Daughters,” reported earning $102,161 in book royalties. Senator John Ensign , a Nevada Republican, received between $100,000 and $250,000 as partial payment for the veterinary practice he sold after being elected to the Senate. House Financial Services Committee Chairman Barney Frank , a Massachusetts Democrat, received round-trip airfare to Los Angeles, a hotel room and meals for a May appearance on comedian Bill Maher ’s television show. Milwaukee Bucks Wisconsin Democratic Senator Herb Kohl , owner of the Milwaukee Bucks basketball team, holds his assets in a blind trust worth more than $50 million. The trust earned more than $5 million last year. Representative Leonard Boswell , an Iowa Democrat, made between $50,000 and $10,000 selling calves for breeding. Representative Sam Graves , a Missouri Republican, sold a 1967 Piper Cherokee airplane for between $15,000 and $50,000. Senator Orrin Hatch , a Utah Republican, reported almost $12,000 in book and music royalties. Other authors included Senators Jim DeMint , a South Carolina Republican, who received $42,500, the second half of a book advance, and Byron Dorgan , a North Dakota Democrat, who received a final payment of $29,750 for his book. Kentucky Republican Jim Bunning , the only U.S. senator in the Baseball Hall of Fame, earned $18,000 for appearances at baseball card shows and received Senate Ethics Committee approval to accept a $12,300 ring from his former team, the Philadelphia Phillies, to commemorate its 2008 World Series win. To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net .

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Louis M. Guenin: Regulating Collateralized Debt Obligations, the Elephant in the Room Untouched by Financial Reform Bills

June 10, 2010

In Alice in Wonderland , a young man remarks to Father William, “You incessantly stand on your head. Do you think, at your age, it is right?” Members of the U. S. Senate manifested a like puzzlement at a recent hearing as they observed the stance taken by Goldman, Sachs & Co. as seller of collateralized debt obligations. CDOs are notes or bonds dependent for repayment on their issuer’s stake in a designated portfolio of asset-backed debt obligations. The recent allure of CDOs lay in high yields coupled with high credit ratings. Institutions are reported to have purchased more than $1 trillion of these securities before the bubble burst. Then consumers began to default in large numbers on underlying loans. Lenders holding CDOs found themselves without an active market in which they could sell or evaluate their doomed holdings. So lenders curtailed lending. The resulting credit freeze contributed to the near collapse of our financial system. What caught senators’ attention was the good fortune of those CDO sellers that managed to turn profits as their customers lost their shirts. Goldman Sachs accomplished this by positioning itself not only as well-compensated CDO organizer-seller, but as holder of short positions in the CDO issuers’ portfolios. The organizer bet on the portfolios’ demise. To senators, this self-serving posture bespoke a conflict of interest. For the investment bankers, as for Father William, the stance evidently was so habitual that it did not even seem odd. When challenged on this at the hearing, Goldman Sachs responded by cloaking itself in the mantle of market maker. It had been a mere trading intermediary whose advice was neither sought nor given. To which one of its executives added, “I do not believe that we were acting as investment advisers.” As the Senate hearing adjourned, there the matter stood. Senators had condemned the conduct they observed. They had not given a cogent moral argument for a rule that the conduct violated. The investment bankers had understated their role–of which more shortly–and that portrayal had gone unrefuted. The Legislative Gap Whereas the issuer of “cash” CDOs invests note proceeds in asset-backed and other securities, the issuer of “synthetic” CDOs, the sort most commonly issued, takes a long position in a hypothetical (or “reference”) portfolio. The synthetic issuer acquires that position in a credit default swap–a contract in which, in exchange for periodic payments from a credit protection buyer, the issuer assumes risk of default on the reference portfolio obligations. That is to say that the issuer sells the equivalent of a naked put. Critics maintain that synthetic CDOs do not provide significant economic benefit and succeed only in spreading risk too widely. The economist Paul Krugman and others have recommended that Congress prohibit synthetic CDOs. About a month after the aforementioned hearing, the Senate passed its financial reform bill. That bill now awaits reconciliation with its House counterpart. Surprisingly and inexplicably, the Senate and House bills fail to institute any significant regulation of CDOs. Both bills are entirely silent on synthetic CDOs. Only one sentence might be read to reach cash CDOs (this in the Senate bill about disclosing underlying assets, though that reading would require wrenching the sentence from its context of asset-backed securities other than CDOs). It seems that as the drafters trained their sights on credit default swaps and mortgage-backed securities, they missed another elephant in the room. How could this omission occur after havoc so notorious? I have given the details of the legislative analysis elsewhere (see memorandum ). Confusing draftsmanship in the Senate bill may have left the impression that its “skin in the game” rule captures CDOs. Such rule provides that if an organizer wishes to arrange an offering of mortgage-backed or like securities–this by selling to an issuer mortgage loans or similarly self-liquidating obligations to serve as collateral–the organizer must retain at least 5% of the credit risk on obligations sold. The committee report states that thus allowing organizers to unload assets only if they are willing to maintain a partial stake in them will “ensure they won’t sell garbage to investors.” This rule is salutary so far as it goes, but it does not capture CDOs. A cash CDO issuer may acquire its collateral not from the organizer but in arm’s length transactions in the open market where sellers do not retain interests in assets sold. The collateral will usually comprise asset-backed and other securities, and might not include any loans or unsecuritized obligations. In the case of synthetic CDOs, no one ever sells reference portfolio obligations to the issuer. Locating the Conflict of Interest For both understanding and action, we can do better. An objectionable conflict of interest does lie athwart the transactions in point. We shall see this after first defining a conflict of interest, then observing carefully what goes on in a CDO offering. Because it does not seem politically likely that any type of CDO will be prohibited, this conflict’s potential for future havoc beckons us to act. I propose below a legislative provision that, by establishing a counterincentive, will preclude one of the circumstances that presents the conflict. In support of that proposal, I argue that disclosure of the conflict would not suffice to prevent its harm. A conflict of interest in the present context consists in an intrinsic incompatibility of a self-benefiting interest or commitment with an other-regarding commitment . If you find that you cannot fulfill your duty of promise-keeping to Jack while fulfilling your duty of truthfulness to Jill, you face a conflict between two other-regarding commitments, not a conflict of interest. An interest or commitment may be both self-benefiting and other-regarding (e.g., your interest in compensation for performing your duties at work). If you work such long hours that you neglect the care of your elderly parents, you may be overcommitted, but your commitments are not intrinsically incompatible. An intrinsic incompatibility obtains when, even assuming that the agent possesses unbounded resources, the self-benefiting action or forbearance would inevitably compromise fidelity to the other-regarding commitment. An investment bank effectuates an offering of CDOs by planning the structure of a deal, arranging for formation of a Cayman Islands corporation to issue notes, recruiting buyers, purchasing notes, and reselling notes to buyers. In such capacity, the bank is known as the “underwriter” in a public offering and as the “initial purchaser” in an offering to qualified institutional buyers. We shall use “underwriter” for both cases. In its preclosing activities, a CDO underwriter selects the issuer’s portfolio obligations. Or in some cases, it delegates selection to a firm regarded as an expert in credit risks. Investors’ returns depend entirely on that portfolio. The underwriter’s direct or indirect involvement in portfolio selection constitutes the first of two circumstances that bring to bear a conflict of interest. A CDO deal will also present the underwriter with the opportunity to acquire and maintain a short position in the issuer’s portfolio or the notes. In the case of synthetic CDOs, the underwriter acts as credit protection buyer and acquires a short position at the closing. This is a valuable opportunity: the underwriter probably could not find a seller in the credit default swap market of credit protection on so large a stake in the selected portfolio. Or so the decision to pursue the CDO deal indicates. If the underwriter expects to maintain a net short position, then in the period before the closing, as the underwriter participates in portfolio selection, a strong incentive will arise to arrange a weak portfolio–a portfolio expected to experience defaults generating profits for those who have shorted it. Even if the underwriter does not want a short position, the underwriter is keen to collect large underwriting fees and profits at the closing. If, as commonly happens, the request of a party desiring to acquire a short position in a contemplated portfolio initiated the CDO offering, and if that single firm is local, insistent on getting what it wants, and has spent months saying so to the underwriter, while, on the other hand, prospective investors are diverse, remote, less frequently in communication, and in some cases are given only a matter of days to review a circular before deciding whether to subscribe, the underwriter may tilt the balance between the two sides in favor of the more demanding short side. Meanwhile the underwriter will be representing to prospective investors that the portfolio has been chosen on the basis of astute credit analysis. If there is a selection agent, the underwriter will speak, as did Goldman Sachs, of the agent’s “alignment of economic interest” with investors. The underwriter’s opportunity to acquire and maintain a short position, and, in the synthetic case, the asymmetrical pressure to satisfy the short side notwithstanding what the offering circular says about criteria of selection, constitute the second of the circumstances that bring to bear a conflict of interest. In selling securities, it is unlawful to utter a false material statement or to fail to disclose any material information needed to avoid a misleading presentation. This places a burden on an underwriter to disclose how a CDO issuer’s portfolio was selected. If the underwriter has contributed to crippling the portfolio, then as the underwriter hunts for investors and pursues rating agencies for favorable ratings, a powerful incentive against candor comes to bear. The underwriter will not want to offer a thoroughly candid revelation of any adverse portfolio selection for fear of scaring off prospective investors. Prospects understand that any proffered portfolio will have been composed with an eye to what a short side counterparty would accept. They also rely on the explicit or implicit characterization of the portfolio as a product of credit analysis that in some significant sense serves the interests of investors. They do not assume that the underwriter, the only transacting party that could foster investor interests, has thwarted those interests. If that understanding were exploded by a revelation that the underwriter has been aligned in economic interest with the short side, the revelation could kill the deal. A conflict of interest thus obtains in any CDO offering whose underwriter wishes to maintain, or elects to favor, a short position in the portfolio or notes. The conflict of interest consists in intrinsic incompatibility between, on the one hand, an interest in crippling the portfolio while still attracting purchasers of the CDOs, and, on the other hand, the duty not to mislead investors in any material respect. An underwriter who skews and then shorts a CDO portfolio has been compared to a boxing promoter who fixes and then bets on a fight. In both cases the scheme defrauds those unaware of the fix. Beguiled By Their Own Business Speak? Investment bankers still have not recognized this conflict of interest. When asked whether they saw a conflict of interest, Goldman Sachs executives implied, and senators seemed to suppose, that if there were a conflict of interest, it would obtain because an investor was already a customer. In this they were mistaken. When Goldman Sachs denied that its investors were advisory clients, it knocked down a straw man. The aforementioned conflict of interest inheres in the transactional structure, no matter who the investors are. Perhaps the investment bankers have believed their own business speak. Consider the characterization, mustered in Goldman Sachs’s defense, that its ABACUS deals were a “platform originated as a way to hedge Goldman Sachs’ exposure.” Rabobank has alleged that Merrill Lynch viewed a CDO deal as a “hedging instrument.” Cant about “managing our risk” and “hedging our exposure” betrays the promotion of a self-benefiting interest despite an other-regarding commitment. When joined with a conception of self as market maker, this view loses sight of legal obligations. A market maker buys and sells extant securities. An underwriter participates in creating, presenting, and selling new securities. An underwriter chooses to enter into a transaction subject to the antifraud provisions of the securities laws–which govern “in the public interest and for the protection of investors.” Investment banks orchestrating CDO deals act as underwriters. To hear Goldman Sachs executives testify that their firm acted as a market maker, one would think that they had not read their own offering circulars. Proposed Constraint to Prevent Harm from Conflict of Interest The situation at hand wants for some constraint, counterincentive, or mechanism to engage an incentive to deceive that has punctured the integrity of a market, and the integrity of participants. I propose a protective incentive. The provision works by precluding the second of the circumstances that would present the conflict of interest. It removes the short side incentive. It replaces that incentive with what we may call ‘Alignment With Investors in Portfolio Selection’ (‘AWIPS’). The provision takes the form of the following amendment of the Securities Exchange Act of 1934. (a) An underwriter or initial purchaser of collateralized debt obligations, any other party acting as protection buyer from the issuer, and any party acting as portfolio selection agent must, prior to the offering of such securities, obligate itself by contract to the indenture trustee for benefit of the noteholders that it will maintain an investor-aligned position in the issuer’s portfolio obligations and in the notes until maturity of the notes, and that if it does not do so, it will disgorge to the trustee any profit from a net short position. An ‘investor-aligned position’ shall be a net long position of at least such magnitude, relative to the notional size of the offering, as the Securities and Exchange Commission by rule determines to be requisite so as to provide sufficient disincentive against effecting or favoring adverse selection of the portfolio. The Commission may elect to establish a higher such magnitude for offerings of synthetic securities. (b) An underwriter, initial purchaser, protection buyer, or portfolio selection agent shall disclose for benefit of prospective investors any attempt to influence selection of the issuer’s portfolio obligations by any prospective or actual short side counterparty of any party acting as protection buyer, or by any other party believed to be interested in taking a short position in the notes or in any part of the portfolio. Such disclosure shall include the identities of any securities proposed by any such party for inclusion in the portfolio. (c) For structured finance securities other than collateralized debt obligations, the Commission shall have the authority to establish by rule such provisions corresponding to subsections (a) and (b) as the Commission determines to be appropriate so as to provide sufficient disincentive against adverse selection of the issuer’s portfolio. The moral foundation of AWIPS consists in the following. Prospective CDO investors will be given the impression, explicitly or implicitly, that the portfolio selector has acted in “alignment of economic interest” with the investors. That’s what Goldman said in an ABACUS “flip book,” and that kind of pitch is inevitable when an underwriter tries to sell a deal. Salesmen praise their products. When the typical narrative is given of how the portfolio was selected with the benefit of credit analysis and expertise, prospective investors should be able to rely upon it. Because we are each bound by a duty not to deceive, an underwriter should not presume to select securities while benefiting from the impression of selection in alignment with investors even as the underwriter seeks to foster a bet, for itself or another, that the securities will default. If one exploits an impression of alignment, the alignment should obtain. Investors rightly expect enough integrity of underwriters that investors are not forced to guess whether the deal was designed to fail. As a policy, AWIPS constitutes a counterpart of, and its rationale is at least as compelling as that of, the “skin in the game” rule. In legislating so that securitizers “won’t sell garbage to investors,” Congress wisely mandates that securitizers be long in assets pooled–assets in which transactions would otherwise leave securitizers neutral and untempted by any opportunity to short. A fortiori , Congress should require that underwriters be long in assets as to which a transaction dangles–often having been initiated for the purpose of creating–an opportunity to short. Requiring alignment with investors qualifies as an appropriate protection whenever a party is given the opportunity both to compose and to short the exclusive source of investor returns. We have seen how that dual opportunity arises when the issuer is a shell corporation holding only those assets selected directly or indirectly by an underwriter. The dual opportunity does not arise in the general case in which an issuer constitutes an active business not run by an underwriter. The special case warrants a constraint not needed in the general case. AWIPS does not prescribe the quality of a security: it is a constraint on transactions, not securities. Such constraints are numerous (e.g., the SEC rule constraining short selling in anticipation of public offerings). AWIPS is a small price for underwriters to pay for the integrity of markets and control of systemic risk. A CDO’s asset-backed portfolio obligations are not requisites of an institutional investor’s portfolio; there exist many alternatives. If by dint of AWIPS, large institutions who underwrite offerings can no longer efficiently make markets in asset-backed securities, other firms will. More on AWIPS is given in my memorandum . The pending conference between House and Senate presents an opportunity, which should not be missed, to fill the legislative lacuna with this protection. Disclosure Alone Will Not Prevent Harm Underwriters expect sophisticated investors to bear the burden of their own risk-taking in good faith dealings. The following answers a predictable plea to do nothing about the identified conflict of interest other than require disclosure. We tolerate some circumstances characterized by conflicts of interest in the belief that disclosure minimizes harm. Such is the case for a physician who enrolls her patients in a clinical drug trial under appropriate constraints. We disallow other circumstances characterized by conflicts when we judge that the average mortal probably would not faithfully serve the two masters. A lawyer may not represent two adverse parties, a mayor may not award his company a no-bid contract. Circumstances characterized by conflicts in the joint conduct of commercial banking and investment banking were barred by the Glass-Steagall Act. The choice to tolerate or prohibit conflict-ridden circumstances turns on expected harm. Suppose that instead of AWIPS, we require only disclosure of an underwriter’s conflict of interest. Would that prevent the harm? We’ve already run that experiment. In the recent debacle, offering circulars routinely stated under the heading “conflicts of interest” that CDO underwriters might take either long or short positions. They also precisely identified each portfolio obligation. This did not spare investors the alleged fraud worked by manipulating portfolios to subserve short interests of both underwriters (e.g., in Goldman Sachs’s Hudson Mezzanine 2006-1, Anderson Mezzanine Funding 2007-1, and Timberwolf I, and UBS’s North Street 2002-4) and counterparties (e.g., in deals by JPMorgan Chase, Merrill Lynch, Deutsche Bank, and other banks at the behest of Magnetar, and ABACUS 2007-AC1 challenged in SEC v. Goldman, Sachs & Co. et al. ). Would more disclosure prevent the harm? Consider that if a prospective investor reads an expose that a portfolio was assembled to serve an underwriter’s short interest, or skewed to favor the demands of a short side counterparty, that will kill any interest in the offering. So the underwriter will not write such an expose. If instead the prospect reads a predictably wooden passage relating underwriter freedom to be short or long, and adverting to negotiations that led to the portfolio, what inference may the investor draw? The market in CDOs is, in respect of information, far from efficient. A sophisticated institutional investor’s window of time to consider a pending offering may be small, as the SEC has recently emphasized. Reading a negotiating history probably will not provide enough information reliably to infer effects of indicated bias. The history surely will not reveal any nonpublic information that the underwriter used in portfolio selection–yet the gravamen of a claim against UBS is that just such information was used in portfolio selection to defraud CDO investor HSH Nordbank. Goldman Sachs itself argues that when the short side is participating in portfolio negotiations, disclosure of the back-and-forth communications will not much help prospective investors. Investors, it says, need an assessment of portfolio content. As to that content, because CDOs are second-level asset-backed securities, CDO underwriters will not know much about the mortgages or like assets lying two levels below. Those assets constitute the ultimate source of payment and risk. The SEC has confirmed that CDO issuers are not expected to provide information about that ground-level collateral, but only about the CDOs’ own portfolio. As for that, institutions that invested in Magnetar-initiated deals, so ProPublica reports, “simply didn’t have the time or the inclination to investigate the contents of every triple-A bond they were shown. Most investors chose not to dig too deeply.” As the SEC has noted, busy investors rely on ratings, (and thus again on the underwriter-cultivated impression, in this case given to rating agencies, of a valuable portfolio). The rational reader of an offering circular will infer that the described credit expertise has been deployed to select worthy investments for investors, for otherwise, the reader will reason, how could the deal successfully be marketed? Under these circumstances, disclosure of a conflict of interest, joined with more disclosure about the portfolio expanding an already fulsome circular, will likely be insufficient for a reliable inference about what effect the conflict has had on the portfolio. No transaction party is likely to serve well both short and long interests. Absent constraints, we cannot expect financial institutions presented with powerful and incompatible incentives to act like archangels. We can only assume that they will act as aggressive, creative profit-maximizers. When underwriters think credit defaults likely, they will bet accordingly if the opportunity arises. Underwriters who choose to bet on the short side will then face a choice between deceiving investors and killing a deal. If the fix is in, they doubtless will not risk killing a deal. Thus mere disclosure will not reliably prevent the harm threatened by the conflict of interest. Appropriate policy therefore will constrain the transaction to prevent the harm. Observations on Ethics and Economics in Finance It is a sad state of affairs to hear a commentator refer, even if hyperbolically, to “what the investment banks do every day, which is spin rampant-conflicts-of-interest into megasurefire profits.” We are repeatedly reminded that people nowadays arrive in the business world unaccustomed to recognizing ethical concerns in everyday encounters. The societal origins of this may lie in a decline in religious influence on the young. The solution to the problem for adults already in the workforce is not obvious. A second concern provoked by this latest display of homo oeconomicus run amok is the prejudice, rife among financiers, that all market problems will self-correct. As every first-year student of macroeconomics learns, there exist no perfectly competitive markets. Like the frictionless plane, perfect competition is an idealization. There obtains amongst economists a long-acknowledged verity: government performs the salutary function of counteracting imperfections in actual markets. If that were not already clear from theory, we learned it from the Great Depression. Republican Congresses and administrations in recent times seemed blind to that history. They appeared oblivious to the dangers of monopoly that motivated Teddy Roosevelt’s trust-busting. They insisted on the improvident repeal of the Glass-Steagall Act, a cornerstone of the institutional structure erected in 1932 to assure soundness of the banking system. They were, to paraphrase what Paul Samuelson once said of utilitarians, drunk on market-romanticizing antigovernment moonshine. On an economy that had experienced during the Clinton years a record-setting combination of robust growth, low inflation, and low unemployment, they foisted their two panaceas–tax cuts and “deregulation.” The economy now lies in the throes of these excesses. “Deregulation” across the board subverted the public interest by allowing the regulated to shackle the regulatory agencies. Statutes concerning agencies usually grant them authority, but Congress went so far as veritably to prohibit the SEC from imposing registration or reporting requirements concerning credit default swaps. The SEC’s Division of Enforcement, whose day-to-day business is litigation, did little of it. The Antitrust Division of the Department of Justice did not enforce the antitrust laws. As Goldman Sachs alumni administered the TARP program, they did not require banks to covenant that they would lend the money provided to them. We are paying a heavy price for this latter-day experiment in laissez faire . We are enduring the sort of crisis that our post-Depression institutions were constructed to prevent. As the Duchess says to Alice, “Everything’s got a moral, if only you can find it.”

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Dov Seidman: The Economy: Don’t Hit the Reset Button

May 24, 2010

With apologies to rapper-actor L.L. Cool J and his song “Mama Said Knock You Out,” don’t call it a comeback. In fact, let’s not call our wobbly progress from the brink of a global financial meltdown a “recovery.” Why? Because we are doomed by our collective mindset to plunge into more financial crises as soon as we recover. Some of the world’s top business leaders, including General Electric Chief Executive Jeffrey Immelt and Microsoft CEO Steve Ballmer, have rightly recognized that we need to create a fundamentally different way of pursuing business and human endeavor. “This economic crisis doesn’t represent a cycle,” Immelt recently noted. “It represents a reset. It’s an emotional, social, economic reset.” I agree with the sentiment, but I think it doesn’t go far enough. I submit that we ought to call our shared endeavor a “rethink.” Whereas the term “reset” suggests we need to reboot our business software, the term “rethink” can help inspire us fundamentally to reexamine our companies, institutions and countries to make them 21st-century compatible. The problem is we continue to attempt to function according to a 20th-century operating system whose catastrophic bugs have been exposed as critical flaws. The Same, But Worse Merely rebooting our financial, political and social systems will bring more of the same, only worse: more intense crises that strike with greater frequency due to the hyperconnected, interdependent nature of our economies, businesses and lives. In reflecting on our current crisis and on the nature of crisis itself, I have come to think that essentially two types of crises have confronted us as humans. The first and far worse type is the “End of Life” — the crisis that threatens to annihilate us by destroying our very existence. Think about the Cuban Missile Crisis or a massive meteor hurtling toward our planet. The second type of crisis, what I call a “Way of Life” crisis, is far more common. While the effects can be devastating, they are not deadly. Unfortunately, we continue to respond to Way of Life crises as if they were End of Life crises, and that’s why we need to rethink our response. Way of Life crises such as the Great Depression, other global financial meltdowns, broken health-care systems and crumbling infrastructure do not pose the risk of physical annihilation. Instead, these crises disrupt deeply ingrained ways of thinking and behaving. The prices of real estate, dot-com company shares and tulips, it turns out, will not soar forever. Cheap credit will not always be available. Trying To Ban Innovations Yet we react — or more accurately, overreact — to Way of Life crises as if these challenges were the same as having a meteor zeroing in on our planet. “When bubbles burst and are followed by a wider economic crisis, as happened in 2008, the danger is that we overreact by trying to banish the innovations that sparked the boom, rather than learning how to use them wisely,” write Matthew Bishop and Michael Green in their book “The Road from Ruin: How to Revive Capitalism and Put America Back on Top” (Crown Business, 2010). The popping of a financial bubble, which is another Way of Life crisis, generates irrational states of panic and fear and such behavior as blame, paralysis and hunkering down. Hitting the reset button — if one magically existed — would only place us on the path to overreacting to the next Way of Life crisis. We have become locked into these extreme emotional and behavioral patterns, which poses problems on three fronts. First, history shows that reacting to a financial crisis with a mix of fear, panic and blame only intensifies and prolongs the financial crisis, as the world experienced during the Great Depression. Second, the frequency, intensity and unpredictability of our crises will only increase due to the interconnectedness and interdependence of our world. A volcano in Iceland kept planes from flying to and from Europe. And as we have seen with Greece, a small country flirting with bankruptcy can sap billions of dollars of shareholder value in one day. In the last century, our nascent global economy thrived despite the Great Depression. We were perfectly happy to suffer through recessions when they occurred only every 15 to 30 years. We are less willing to endure recessions when they threaten global stability more frequently. Cooler Heads Make the Profits Third, a subset of countries, companies and individuals always responds more moderately and, as a result, more profitably to crises, and that is what is owed to stakeholders. As New Yorker business columnist James Surowiecki points out , Kraft (Miracle Whip), Texas Instruments (the transistor radio) and Apple (the iPod) are among the highly successful companies that introduced game-changing products during the depths of economic downturns. Given the increasing frequency and intensity of the economic crises in our hyperconnected world, we need to find a bulwark against our extreme reactions. Sustainable values are just the bulwark we’re looking for. During Way of Life crises, the companies and individuals who thrive (while others batten down the hatches) embrace sustainable values over situational values. Sustainable values arise from within company cultures and focus on long-term priorities that do not waver during bursts of volatility. Situational values change in reaction to external ups and downs: We engage in questionable selling, sourcing, cost-reduction or accounting practices because external conditions call for doing so. Sustainable values are what Franklin Delano Roosevelt was seeking to inspire in Americans when he proclaimed that the country had “nothing to fear but fear itself” during the Great Depression. Roosevelt understood that when citizens lose hope and meaning, they hunker down, grow fearful of one another, and progress stagnates. Given that the need for sustainable values has never been greater in the modern business era, the question is, do countries, companies and individuals have the will to embrace sustainable values? A Crisis of Ethics Sustainable values took center stage at January’s World Economic Forum in Davos, which this year had the theme “Rethink, Redesign and Rebuild.” It was striking to see 28 world leaders and dozens of CEOs at the world’s largest and most innovative companies rallying around what a preconference survey identified as not a financial crisis but one of ethics. Rather than values-based discussions being relegated to the margins of the event, the world’s breakdown in values took center stage alongside comprehensive considerations of global regulatory reform, corporate governance and global sustainability challenges. At the same time, Toyota, the world’s largest automaker, plunged into a crisis of its own. What is striking about Toyota’s difficulties is how customers, regulators and other stakeholders judge the company. Rather than dwelling on the company’s faulty automobile components (Toyota’s “Whats”), people are peeling back the company’s culture (Toyota’s “Hows”) to find out if behavior and values within the company caused and/or exacerbated its problems. Inside boardrooms, more business leaders appear to grasp the importance of behaviors and sustainable values. When John Deere hired CEO Sam Allen last summer, Allen was asked what he planned to change. His predecessor and the company’s current chairman, Bob Lane, explains that Allen was very clear on that matter. “His response … was, ‘It’s too soon to tell what we’re going to change. But what we’re not going to change is the how and the way we do business.’” Like Lane, Allen and other inspirational corporate leaders, Davos attendees and Toyota executives now understand the importance of “the how.” Rest assured, the 21st-century versions of Apple, Texas Instruments and Kraft are aggressively rethinking the basics. As they do, they are no doubt focused less on 20th-century levers of outperforming and more on 21st-century modes — such as sustainable values and inspirational leadership — of outbehaving the competition. So don’t call it a comeback. If we treat our current problem that way, we will still be right here, mired in the 21st century’s ever-accelerating crisis cycle for years. And it just may knock us out. *This column appeared in, and was written for, BusinessWeek.com .

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Gary Shapiro: Want to Create Jobs? -Think Like Job Creators

May 7, 2010

Today’s unemployment numbers reflect a mixed bag. One in ten Americans looking for jobs are unemployed. Many more Americans are the “discouraged” unemployed and no longer counted in the unemployment rate. On the other hand, some 250,000 new jobs were created last month-albeit many are temporary government census takers. Republicans and Democrats now agree on which two big issues matter: in the short term it is unemployment and in the long term it is the federal budget deficit. But as the high unemployment numbers reflect, government’s well-intended spending to reduce unemployment has not worked. Worse, these mammoth spending programs are exacerbating the federal budget deficit. Consider the 2009 stimulus package, which promised to bring unemployment below eight percent. One-third of the $880 billion spent went to states so they didn’t have to make tough decisions, cut employees and rein in ‘out of control’ government pensions. The states got a two-year reprieve but still face serious financial issues in 2011. They will certainly be back soon asking the federal government for more money so state workers do not have to be fired. Another one-third of the package went to various pork barrel projects wrapped in the more aesthetically pleasing “green” wrapping paper of clean energy, broadband deployment and “shovel ready” construction. Certainly, some of these projects have value and created some jobs, but were they enough to borrow from the future? The final one-third went to reduced taxes for all Americans except the wealthy. This certainly pumped money into the economy and was the cleanest part of the stimulus. But after this enormous spending package, which was supplemented by cash for clunkers, unemployment benefits extensions, homebuyer tax credits, and now a new health care law, we are two trillion dollars more in debt; and, due to deficit spend, another trillion dollars in the next ten years. (Keep in mind this is under the unrealistic assumptions of the Administration about eliminating war spending, no big disasters, no bailing out states, the health care law not affecting the deficit, low unemployment and solid economic growth.) And what do we have to show? Since the passage of the stimulus bill, which promised to “save or create” four million jobs, we have lost 2.4 million jobs in the private sector but created over 150,000 jobs in the public sector. The reason these programs failed is that they often have the exact opposite impact of what their well-meaning legislators intend. Take “cash for clunkers” for example. Sure Uncle Sam subsidized sales of many new cars, which wouldn’t have otherwise been sold…but by taking perfectly good older cars off the roads and destroying them (as the law required), aftermarket auto parts manufacturers, installers and retailers lost business and had to cut jobs. Or even take something as helpful to those truly in need like unemployment benefits. For most, I believe it is a necessary hand…for others, it is an excuse not to get a job. This past year, I met two job candidates who drove this point home. With one, the interviews were over and we were talking about a job start date…to my chagrin, the candidate asked that she withhold starting until after her unemployment ran out. Another said he had to look for a job “seriously” as his unemployment went out so he was contacting me as an old colleague. Given their ethics, neither candidate got a job offer but the broader point is that well-meaning programs can and do have unintended effects. Another striking example is the first-time homebuyer credit. It really was a gift to people who already owned starter homes and were able to raise the price of their homes so they could buy another one. Why these people needed a lift is beyond me and I am not clear why this was a worthy reason to borrow from future taxpayer income. So what can and should a government do to create jobs? Well, first recognize that other than hiring government workers with taxpayer money (which could have been spent on investing in job creating ventures), the government does not create jobs. Rather, it creates conditions under which job-creating employers feel confident investing. Our economy is struggling because employers fear their government. They have been hit with a confusing health care plan, with new taxes on investment and a deficit so large that they expect new taxes to come. At the same time, most businesses have seen their banks stop seasonal lending. This uncertainty about government action combined with a lack of capital has restricted new hiring and investment. More, the banks’ refusal to lend alone has caused many retailers to close their doors, as they cannot finance their inventory. If the government wants Americans to get jobs, it is simple–stop spending and stop trying to “spread the wealth around”–create some certainty in future taxation and allow banks to lend money to the same companies that have been lending to for many years.

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Lawrence G. McDonald: Inside the Berkshire Hathaway Annual Meeting

May 5, 2010

Last weekend I attended the Berkshire Hathaway Annual Meeting in Omaha, which has become a Mecca for investors, packed with 25,000 shareholders from all over the world. I had never seen anything like it, in all my years in finance. Warren Buffett and his lifelong business partner, Charlie Munger, sat on stage for nearly six hours, dazzling the crowd with financial acumen, incredible energy, and absolute honesty into their world of money management. In a marathon five hour question and answer session, they gave everyone a chance to be heard. This was the most impressive display of corporate transparency I had ever seen. Everyone there, most of them scribbling notes, heard firsthand the thoughts of these two billionaires on an abundance of issues: Greece, the Euro, the International Monetary Fund, Goldman Sachs, Derivatives, High Yield Bonds, the Stock Market, Politics, Renewable Energy, Ethics, the US and Global Economy, the Emerging Markets, Finance Reform, Philosophy, History… they covered it all. But the highlight of the trip was a 40-minute, one-on-one meeting I had with Charlie Munger, who had read my New York Times Bestseller “A Colossal Failure of Common Sense,” and actually wanted to meet me… I almost couldn’t believe it. Munger is considered by many to be Buffett’s alter ego, the conservative skeptic who keeps the Oracle in check. Or just a loyal friend and business partner for over 40 years. It’s all true. It was an honor to meet Mr. Munger, not because he’s a billionaire, but because he represents the end product of a life built on a 24-carat gold business character. Imagine the tallest and widest of the great California Redwood trees just south of the Oregon border. When you look at this magnificent 2,000 year old Sequoia, over 375 feet high, it’s what you can’t see that’s most impressive; a root system over 250 feet wide that runs deeper than tree’s actual height. Now that is a foundation. Munger and Buffett have run their business, Berkshire Hathaway, with that type of foundation in mind. They operate in a completely opposite way from most public companies. They run their business, and let the stock price take care of itself. Most CEO’s try and manage the stock price first and the company second. This was the problem at Lehman Brothers… ethics, treating your employees right, putting your customers and shareholders’ interests first, all came second to running the stock price. Whether it be accounting gimmicks or raising our dividend when we were almost bankrupt, it was all about trying to fool investors and shareholders into thinking we were just fine. When it comes to ethics, character, and treating your employees and shareholders the right way, Berkshire does it like no other. They are a model for business ethics, and I could tell both men were torn over Goldman Sachs. Berkshire made a bold investment in Goldman during the depth of the financial crisis, plunking down $5 billion for a 10% convertible preferred stock which pays Berkshire $15 a second, every hour, of every day. One of Buffett’s first thoughts of every day was the $432,000 Berkshire Hathaway had made while he was sleeping. And sitting in that shareholder meeting a few days ago, I got the feeling Buffett and Munger were in a real dilemma. First, Goldman is probably their oldest of friend. Buffett pointed out to the audience back in 1967 he and Charlie were trying to borrow $5.5 million in a bond offering and there were not enough takers. But it was Goldman and Kidder Peabody who came to their aid with an extra $400k to complete the deal. To Buffett and Munger loyalty is everything. They’re torn, because they want to stand by an old friend, one who’s paying them very well. Buffett and Munger spoke at great length about their dark days around their large investment in Salomon Brothers. In the late 80s Berkshire ended up owning over 12% of Salomon but a few years later they all ended up in hot water after a scandal broke out in regards to Salomon’s business practices around trading treasury bonds. Back then, Buffett made a famous stand to Congress, the regulators, Berkshire Shareholders and Salomon employees. Buffett is not only a brilliant investor, he knows how to relate to people in very unique ways. Back then, he talked about ethics, and conducting business as if your actions were on display in your hometown newspaper for everyone to see. He replayed the grainy 1970′s C-SPAN video with him in front of Congress last Saturday. It obviously still means a lot to him. He plays it every year. The problem with Goldman Sachs is that more and more of their revenue, year after year, comes from proprietary trading and competing with clients – other hedge funds and mutual funds. Would the actions of the Goldman Sachs mortgage backed securities team and their actions around the Abacus / ACA / Paulson transaction pass the Buffett local paper test? I don’t think so. Munger said on Saturday, “just because something is legal, doesn’t make it ethical.” There has to be a point where Goldman crossed the line. Twenty years ago less than 30% of Goldman’s revenue was made by competing with the other funds. Today it’s greater than 65%. This troubles Buffett and Munger, especially since right now Goldman is doing it with the FDIC, insuring their customers’ banking deposits. And make no mistake about it; Goldman Sachs would have been out of business if it were not for Hank Paulson and the TARP rescue plan. Buffett and Munger put on a good cop, bad cop display on Saturday, like something off Broadway, but I still get the feeling most of the shareholders are very uncomfortable about Goldman. I was blown away with how much I agree with Charlie Munger’s ideas on finance reform. He feels like I do… that JP Morgan, Citigroup and Bank of America have no business sitting on top of $3 trillion of FDIC insured deposits, and $15 trillion of derivatives. As Charlie said, “if I had it my way, I’d make Volker look like a sissy.” He was referring to the Volker Rule which would force the banks to abolish big risk taking, investing in hedge funds, private equity and derivatives from traditional banking. Mr. Munger, like myself, would like to see more standardized accounting practices between the big four accounting firms and Wall St. All firms should be treated the same way, no matter which accounting firm is signing off on the books. Abuses and innovative accounting moves like Repo 105′s must be made a thing of the past if we want to reduce systemic risks between the big banks. Both Buffett and Munger are bullish on the future, especially the United States, and all of the advantages our capitalist republic provides. But in the near term they seemed very cautious. Their main worries are centered around Greece, and the equity market pricing in higher taxes for the US. Munger said of Greece, “high drama is on the way,” and the Eurozone “experiment” will be stress tested. QUOTES “Honey, if I lost everything, would you still love me?” “I’d love you, but I sure would miss you.” -Munger “If I had to bet my life on higher or lower inflation, I’d bet a lot higher.” – Buffett “Every one of my failures in investing brought me closer to that sweet smell of success. Just learn from each one. Humility builds character through hardship.” – Munger “I like owning a company where your customers tattoo the name of that company on their chest. That’s why I own Harley Davidson.” -Buffett “If I could only invest in the USA, I’d be just fine with that.” – Buffett “Budget deficits of 10% of GDP are a lot of fun, but they can’t be sustained over long periods of time.” – Buffett www.lawrencegmcdonald.com

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Levin Grilling Blankfein Over Ethics Means Clash of Harvard Law Standouts

April 28, 2010

By James Sterngold April 28 (Bloomberg) — Lloyd C. Blankfein and Carl Levin both have degrees from Harvard Law School. Judging from their confrontation on Capitol Hill yesterday, they hardly speak the same language. Levin, chairman of the Senate’s Permanent Subcommittee on Investigations , pummeled Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc. , with a barrage of questions about why the Wall Street firm sold securities it was betting against. Blankfein struggled to complete sentences as he tried to describe what it means to be a market-maker. “Levin had a simple narrative to tell: Goldman bet against their clients,” said Jonathan Taplin , a professor of communication at the University of Southern California’s Annenberg School in Los Angeles. “Blankfein had these long complicated explanations, but I’m not sure the average person listens or cares about that.” The clash of the two chairmen came toward the end of more than 10 hours of public hearings looking into Goldman Sachs’s role in the financial crisis. At times, it seemed like a mismatch. Levin, 75, a Michigan Democrat, frequently interrupted Blankfein, 55, who runs Wall Street’s most profitable bank. “Your people think it’s a piece of crap and go out and sell it,” said Levin, his reading glasses pushed to the tip of his nose, referring to Goldman Sachs e-mails in which traders spoke of selling securities to customers. “We’re talking about betting against the very thing that you’re selling, without disclosing that to your client.” Detroit, Brooklyn Blankfein, often squinting, talked about providing “liquidity” and using “instruments” that give customers “the risk they want.” Levin just returned to his theme. “What do you think about your own people selling securities they think are crap?” the senator asked. Both Levin, who grew up in Detroit, and Blankfein, the son of a postal worker raised in Brooklyn, went to public schools before attending elite colleges. Levin graduated from Swarthmore College in Pennsylvania, and Blankfein from Harvard College in Cambridge, Massachusetts. Both attended Harvard Law School, Levin graduating in 1959 and Blankfein in 1978. Blankfein practiced tax law before joining the commodities firm J. Aron & Co., later acquired by Goldman Sachs. He became CEO in 2006. Last year he received a salary of $600,000 and a bonus in stock of $9 million. ‘Rorschach Test’ Levin worked as an assistant attorney general in Michigan and general counsel for the Michigan Civil Rights Commission before being elected to the Detroit City Council and then winning a seat in the Senate in 1978. He is chairman of the Armed Services Committee as well as the investigations subcommittee and has led probes into unfair credit card practices, money laundering and the collapse of Enron Corp. Last year he made $174,000. The two men have risen to the heights of professions that are held in low regard. Viewers tended to see what they wanted to in the hearing because of cynicism both about Wall Street and Washington, said Victor Hwang, managing director of T2 Venture Capital in Los Altos Hills, California. “It’s a Rorschach test for people,” Hwang said. “Was the financial crisis caused by a failure of the markets or by the failure of government? I am of the belief that the markets utterly failed and that government failed to exercise good oversight. Levin is more credible, but only because Goldman Sachs is near zero right now.” ‘Selling Junk’ Donna Grimme, president of H & N Plumbing and Heating in Prairie du Chien, Wisconsin, saw the confrontation another way. “I blame the politicians more than Goldman Sachs or Blankfein,” said Grimme. “Goldman and Blankfein have more credibility than a senator. The politicians want to get more involved. If the government would stay out of financial markets and let things fall where they may, we’d be better off.” Robert Collet, a real estate broker in Downey, California, said he lost an investment in a condominium that was foreclosed and that his home equity of about $180,000 had been wiped out. He said he believed many politicians were being hypocritical because they had accepted contributions from Goldman Sachs and other financial firms. Still, he said people needed to be protected against aggressive bankers. “I’ll take Levin over Blankfein any day,” said Collet. “I just feel they want it all. If they have 90 percent of something, they’re thinking about how to get the other 10 percent. We need government to protect us from that.” As Levin’s questioning of Blankfein dragged on into the evening, he lectured Blankfein about the ethics of his business. “You shouldn’t be selling junk,” Levin said. “You shouldn’t be selling crap. You shouldn’t be betting against your own customers.” To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net

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Goldman Sachs Pilloried in Senate Showdown, Walks Away $549 Million Ahead

April 28, 2010

By Christine Harper and Michael J. Moore April 28 (Bloomberg) — Goldman Sachs Group Inc. executives endured more than 10 hours of congressional grilling in one of the most public, and most hostile, political lashings in the firm’s 141-year history. By day’s end, the investment bank’s market value had risen by $549 million. Senator Carl Levin and members of his Permanent Subcommittee on Investigations said evidence they presented made the case for Congress to pass legislation tightening financial regulation. Goldman Sachs, the world’s most profitable securities firm, was alone among 79 stocks of the Standard & Poor’s 500 Financial Index in posting a gain yesterday. “Both sides got what they wanted,” said Robert Hillman , a securities law professor at the University of California, Davis. “The Senate probably did what it felt it had to do, which was bring Goldman people up and embarrass them. For Goldman, the goal was to demonstrate that they had not engaged in fraud or illegal conduct. They probably succeeded in that.” The senators, capping a probe of Goldman Sachs that has lasted more than a year, peppered Chief Executive Officer Lloyd Blankfein and six current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank sold mortgage-linked securities to customers. The hearing came 12 days after the Securities and Exchange Commission sued the New York-based firm for fraud, saying the bank misled investors in a mortgage-linked investment, claims the company denies. ‘Jarring’ Realities “The cultural realities of what you all do is jarring to most Americans,” Sen. Claire McCaskill , a Democrat from Missouri and former prosecutor, told Blankfein during the hearing. “This notion of selling a product that you’re betting against is hard for people to understand.” Blankfein, who repeatedly insisted the company had done nothing wrong, said after the hearing that he had “no illusions” about how hard Wall Street must work to win back the trust of the American people. “Wall Street has a lot of work to do to regain the confidence of Main Street,” Blankfein told Bloomberg Television. “We have a lot to improve in our communication with Main Street and we’re committed to do it.” Some senators used the hearing to advertise their position on a financial regulatory bill that’s been blocked by Republicans so far this week. Levin concluded the hearing by calling for tougher regulation than the bill contains, while Republicans including Tom Coburn said they felt the measure fails to address issues such as how to handle companies that are “too big to fail.” Russian, Japanese TV As the day began, a line to enter the hearing stretched down the corridor on the first floor of the Dirksen Senate office building, the equivalent of half a city block. At the head of the queue were four protesters dressed in black-and- white convict stripes and holding “wanted” posters for Blankfein and Fabrice Tourre , the 31-year-old Frenchman who was the only Goldman Sachs employee named in the SEC suit. Television crews from Russia and Japan were among journalists who filled the packed room. Disagreements between the senators and the executives started with how much money the bank earned. Levin said Goldman Sachs made $3.7 billion in 2007 by placing “huge shorts” against mortgage-linked securities. Taking into account losses on securities it held, the firm’s residential mortgage securities had net revenue of less than $500 million, Chief Financial Officer David Viniar said. “How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?” Levin asked Daniel Sparks , who ran the bank’s mortgage unit at the time. “Does that bother you at all?” ‘One Shitty Deal’ Levin was referring to a June 2007 e-mail from Thomas Montag , the former head of sales and trading in the Americas at Goldman Sachs, to Sparks. The message described a set of mortgage -linked investments that his bank had been trying to sell as part of “one shitty deal.” “I don’t recall selling hundreds of millions of that deal after that,” Sparks replied, adding that he believed the e-mail referred to his performance, not the security itself. “If you can’t give a clear answer to that one, Mr. Sparks, I don’t think we’re going to get too many clear answers from you,” Levin said. Goldman as ‘Own Client’ Blankfein, responding to questions from Levin, said the nature of the principal business often puts the firm on the opposite side of customers and market-makers have no obligation to tell clients about their own position in a security. “What clients or customers are buying is they are buying an exposure,” Blankfein said. “The thing we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn’t care what our views are. They shouldn’t care.” Levin, a Michigan Democrat, told Blankfein he’s “troubled” by his view that the company doesn’t seem to understand conflicts of interest. “You can make sure that someone you sell an investment to knows that you believe it’s a bad investment,” Levin said. “You obviously don’t see that. It troubles me that you don’t see that.” Levin added, “It troubles me that you don’t see that your client is yourself. Goldman Sachs has turned itself into its own client.” The U.S. claims Goldman Sachs misled investors by failing to disclose that hedge fund Paulson & Co., which was betting against the U.S. mortgage market, helped the Abacus CDO manager select securities to include in the portfolio. Goldman Sachs has called the SEC’s lawsuit “completely unfounded.” Paulson wasn’t accused of any wrongdoing. Tourre Speaks Tourre , wearing a charcoal-gray suit, white shirt and red- and-navy striped tie, testified that he “categorically” denied the allegations. “I will defend myself in court against this false claim,” Tourre told the standing-room-only hearing. “The securities weren’t meant to fail; they succeeded by conveying the risks that people wanted,” Blankfein told Senator Jon Tester about the Abacus deal. “I’m sorry, it’s like we’re speaking a different language here,” replied Tester, a Democrat from Montana who was a farmer before he entered politics. Tester said “it seemed to me more than just a little bit odd” that Paulson helped pick securities even as he was betting against a CDO that later collapsed in value. The politicians expressed frustration over a lack of direct answers during the first panel, which lasted more than five hours and featured testimony from Tourre; Sparks; Michael Swenson , a managing director in the structured-products group; and Joshua Birnbaum , a former managing director in the group. Don’t Sell ‘Crap’ Levin and Viniar, the chief financial officer, agreed on at least one thing during his testimony: Investment bankers shouldn’t call the securities they sell “crap.” “I think that’s very unfortunate to have on e-mail,” Viniar said, drawing laughter from the audience and the press, after Levin asked how he felt when he read e-mails in which Goldman Sachs employees described mortgage-linked securities as “crap” or “shitty.” “Please don’t take that the wrong way,” Viniar said when pressed by Levin. “I think that’s very unfortunate for anyone to have said that in any form.” Levin then asked, “How about to believe that and sell it?” and Viniar agreed that was also unfortunate. “Well, that’s what you should have started with,” Levin said. To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net ; Michael J. Moore in New York at mmoore55@bloomberg.net .

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Obama Friend’s Chicago Bank Closed by Regulators During U.S. Senate Bid

April 23, 2010

By John McCormick and Phil Mattingly April 23 (Bloomberg) — Regulators have seized the Chicago community bank owned by the family of U.S. Senate candidate Alexi Giannoulias , the Democratic nominee seeking the job once held by President Barack Obama in Illinois. Broadway Bank had been operating since January under terms of a consent order with the Federal Deposit Insurance Corp. because of commercial real-estate loan losses. The fate of the bank, whose profits helped finance Giannoulias’s successful 2006 state treasurer bid, has shaped a contest for a seat Democrats have unexpectedly found themselves defending and one that will help determine whether Obama’s party keeps its Senate majority. “It is early in the campaign,” said Senator Dick Durbin , Democrat of Illinois, when asked earlier in the day whether Giannoulias’s campaign could survive a bank closure. Giannoulias is running against Mark Kirk , a five-term Republican congressman from Chicago’s northern suburbs. Kirk, 50, has repeatedly suggested Giannoulias, 34, exercised bad judgment while working at the bank from 2002 through 2006 as a senior loan officer and vice president, seeking to paint him as a failed banker during a time when Americans are upset about Wall Street bailouts. Giannoulias has tried to limit the political damage by acknowledging that the bank would likely fail, as he pointed to a bad economy that has hurt many family businesses. He also has accused Kirk of campaigning on little more than the bank’s troubles. ‘Noun, Verb, Broadway’ “Just about every sentence that Congressman Kirk utters these days is a noun, a verb and Broadway Bank,” Giannoulias said in an April 12 speech to a civic club in Chicago. The bank was acquired by MB Financial Bank, a subsidiary of Chicago-based MB Financial Inc. , the company said in a news release. The bank will re-open April 24 under the new ownership, the FDIC said in a news release. Kirk is drawing stronger financial support, raising $2.2 million in the first quarter of the year, compared with $1.2 million for Giannoulias. While the broader economy shows signs of improvement, some community banks continue to struggle, collapsing nationwide amid losses on residential and commercial real-estate loans. U.S. banks with problems climbed to the highest level since 1992 in the fourth quarter, and FDIC Chairman Sheila Bair warned Feb. 23 that 2010 failures may exceed last year’s total of 140. From Oct. 1, 2000, through April 20, 2010, Georgia ranked first among U.S. states for the most bank failures, according to FDIC data . Illinois and Florida tied for second. Swing Seats The closure of Broadway Bank, which had $1.2 billion in assets and about 60 employees as of Dec. 31, deals a blow to Giannoulias, a basketball buddy of Obama’s, and to Democrats. The institution operated four branches in Chicago. The Illinois race is one of nine Senate contests rated as a “toss up” by the non-partisan Cook Political Report , based in Washington. The president is scheduled to visit Illinois next week, though no appearances are planned with Giannoulias. Kirk has pointed to dividends paid to family members in 2007 and 2008 and suggested they weakened the bank’s balance sheet. Giannoulias has defended the roughly $70 million paid, saying much of it went to income taxes after his father’s death in 2006. Some Broadway Bank loans also have drawn notice, including those made to Michael Giorango, a convicted bookmaker and prostitution-ring promoter. The bank also made loans to convicted Illinois influence peddler Antoin “Tony” Rezko and a family accused of having connections to organized crime. ‘Risky Lending’ “While years of risky lending schemes, hot money investments and loans to organized crime led to today’s failure, it’s a sad day for Broadway Bank employees who may lose their jobs due to Mr. Giannoulias’ reckless business practices,” Kirk’s Senate campaign said in a statement. In March, a Chicago restaurateur who gave more than $100,000 to Giannoulias — and $4,600 to Obama — was charged with defrauding banks by writing $1.8 million in bad checks. Seeking to distance himself from the bank’s problems, Giannoulias has said that 9 percent of about $240 million in non-performing assets on the bank’s books originated while he was there. The bank, owned by three brothers and their mother, was founded in 1979 by Alexis Giannoulias, the candidate’s father. Obama’s 2004 U.S. Senate campaign committee banked there. Obama Ties The Senate candidate, who first met the president through playing basketball, helped Obama tap Chicago’s Greek-American community for contributions during his Senate and presidential bids. Durbin, who is Giannoulias’s campaign chairman, criticized the media for focusing so much attention on the bank. “Is that going to be the Senate campaign in Illinois?” he asked. “I don’t think it should be. There are bigger and more important issues.” The Senate seat Giannoulias and Kirk are competing for is held by Democrat Roland Burris , who isn’t seeking a full term. Republicans are trying to take advantage of the ethics problems of Illinois Democrats, including a public corruption trial set to begin June 3 for former Governor Rod Blagojevich , who appointed Burris to complete Obama’s term. To contact the reporters on this story: John McCormick in Chicago at jmccormick16@bloomberg.net ; Phil Mattingly in Washington at pmattingly@bloomberg.net .

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Dodd Chief Counsel Traded Financial Securities as Panel Wrote Crisis Laws

March 18, 2010

By Robert Schmidt March 18 (Bloomberg) — Senate Banking Committee Chairman Christopher Dodd’s chief counsel in 2008 traded stock in Morgan Stanley , Wells Fargo & Co., American International Group Inc. and other rescued companies as the panel considered legislation to address the credit crisis, according to her financial disclosure form filed with the Senate. Amy Friend , 51, who is now leading the panel’s effort to write a bill overhauling Wall Street regulations, bought $1,000- to-$15,000 stakes in four banks, weeks after Dodd hired her in January 2008, the form shows. She also owned shares of Fannie Mae , Freddie Mac , AIG and other insurance firms, according to the disclosure document, which she signed on June 5, 2009. The transactions, permissible under Senate rules, included buying $1,000 to $15,000 of Federal Home Loan Bank bonds and Fannie Mae debt in June and July, 2008. On July 30 of that year, then-President George W. Bush signed into law a Dodd-sponsored bill setting out new regulations for the housing finance agencies and allowing the Treasury Department to give them cash injections. “This looks very bad,” said Melanie Sloan , the executive director for Citizens for Responsibility and Ethics in Washington and a former Democratic congressional aide. “At the very least it’s inappropriate and it gives the appearance of wrongdoing, even if there is none.” Ethics Committee Dodd, a Connecticut Democrat, defended his chief counsel. “Amy Friend is one of the fiercest public advocates on Capitol Hill today,” Dodd said in an e-mailed statement. “Her integrity is second to none.” Friend, who declined to comment, informed her supervisor of her holdings, and consulted the Senate Ethics Committee when she was hired, Kirstin Brost , the Senate Banking Committee spokeswoman, said. Friend lists the investments as jointly owned with her husband. She continues to hold financial securities, Brost said. Friend’s disclosure form for 2009 is due in May. Sloan and other ethics specialists say Friend’s stock ownership and trading reflect the leeway lawmakers and congressional staff have with their investments. Unlike Treasury Department employees or bank examiners at independent regulatory agencies who aren’t allowed to hold shares of companies they oversee, U.S. lawmakers and their staff are free to invest with few restrictions. Still, Friend’s counterparts on the banking panel’s Republican side and on the House Financial Services Committee didn’t own financial instruments, according to their 2008 disclosures. ‘Squishy’ Rules The rules “are kind of squishy intentionally,” said Kenneth Gross , a partner at the Skadden, Arps, Slate, Meagher & Flom LLP law firm in Washington who counsels people on ethics regulations. “Congress has permitted the holding and trading of securities virtually unfettered.” Senate rule 37 states that no lawmaker or employee “shall knowingly use his official position to introduce or aid the progress or passage of legislation, a principal purpose of which is to further only his pecuniary interest.” In additional guidance, the Senate Ethics Manual notes that the restriction is “narrow” and says that if the legislation has broad impact, a prohibition wouldn’t apply. The rules require staff that have “substantial holdings” that could be directly affected by a committee’s work to divest, unless they are given a waiver by the Senate Ethics Committee. The ethics panel has told congressional staff that a fair definition of “substantial” would be any single holding equal to 3 percent to 5 percent of total liquid assets. Friend’s combined financial investments constituted less than 2 percent of her liquid assets, below the ethics guidance, Brost said. ‘Not Unethical’ John Hasnas , who teaches ethics as an associate professor at Georgetown University’s McDonough School of Business in Washington, said that while her actions may not look good politically, “the fact that it may appear unethical to others doesn’t mean what you did was wrong.” “If the rules say that she is allowed to do it and the only problem is that it gives the appearance of impropriety, in my opinion she has not behaved unethically,” Hasnas said in a telephone interview. It is impossible to tell the exact amount of Friend’s purchases and sales from the ethics records, which require her to value investments only in broad ranges. She listed each of her financial stocks as being worth $1,000 to $15,000. They included: AIG, Bank of America Corp., Bank of New York Mellon Corp. , Discover Financial Services, Freddie Mac, Fannie Mae, Federated Investors Inc., M&T Bank Corp., Wells Fargo, MetLife Inc. and MGIC Investment Corp., a mortgage insurer. Company Stocks Friend’s portfolio included stocks of more than 100 companies, many non-financial, ranging from Coca- Cola Co. to Target Corp. to Xerox Corp. She also owned mutual funds, municipal bonds and Treasury bills. Friend was an attorney at the Office of the Comptroller of the Currency before joining the banking committee. She also teaches a spinning class at a Northern Virginia gym in her spare time, earning $1,200 in 2008. Friend’s first year working for the panel included the near-collapse of Bear Stearns Cos., the bankruptcy of Lehman Brothers Holdings Inc., the government bailouts of AIG, Fannie Mae and Freddie Mac, and passage of the $700 billion financial rescue law. The committee also considered the Housing and Economic Recovery Act, which provided foreclosure assistance to struggling homeowners, created a more powerful regulator for the home loan banks and Fannie Mae and Freddie Mac, and gave the Treasury emergency authority to bail out the housing-finance giants. Fannie Mae Shares On July 23, as lawmakers neared agreement on the bill, shares of Fannie Mae rose 12 percent to close at $15 in New York Stock Exchange composite trading. Friend’s own Fannie Mae stock holdings would have increased in value as well, though not enough to cover steady declines since she acquired the shares on January 23, when they closed at $34.78 Friend also made five purchases of Federal Home Loan Bank Board bonds in 2008, each valued at $1,000 to $15,000, according to the form . Two were in January, one in February, one in March and one in June of that year. Friend valued her total holdings of the bonds at $50,000 to $100,000, according to the form. She also purchased Fannie Mae debt on July 1, two weeks before the bill, sponsored by Dodd and Senator Richard Shelby of Alabama, the senior Republican on the banking committee, passed the Senate. Bank of America Some of Friend’s trades listed in the disclosure statement were stock purchases — all in 2008 — and may not have been profitable. For example, when she bought Bank of America on Feb. 20, its closing share price was $42.97. She acquired additional shares on May 27, when the closing price was $34.17. It was $17.03 a share at yesterday’s close. Friend purchased AIG on Aug. 12 when its closing share price was $457. About a month later, the firm received an $85 billion loan from the Federal Reserve, the first of several bailouts. AIG shares closed yesterday at $33.61 a share. Very few of the trades in Friend’s portfolio were sales. She did unload $1,000 to $15,000 of Morgan Stanley shares on Sept. 22, several days after then-Treasury Secretary Henry Paulson asked Congress to pass the Troubled Asset Relief Program designed to remove toxic debt from banks’ books. To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net .

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Video: Costa Says Privacy Spat Will Force Swiss Banks to Change

March 12, 2010

March 12 (Bloomberg) — David Costa, a professor at Robert Kennedy College, talks about changes in Swiss private banking due to the disclosure of clients’ details to European and U.S. tax authorities. Costa also discusses the ethics of governments paying for stolen bank data. He speaks with Bloomberg’s Mark Barton from Zurich.

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Levin Says Obama’s Bank Fee `Worth Considering,’ Will Push Buyout Firm Tax

March 5, 2010

By Ryan J. Donmoyer March 5 (Bloomberg) — Representative Sander Levin , the new acting chairman of the House Ways and Means Committee, said imposing a fee on financial firms is “worth considering” and that he intends to press his proposal to boost taxes on executives at private equity firms. Levin, a Michigan Democrat, said in an interview yesterday he’ll convene the committee soon to examine the $90 billion fee plan proposed by President Barack Obama to compensate the government for bailout money provided to American International Group Inc. and other companies through the Troubled Asset Relief Fund. “I think it’s worth considering, but we need to sit down, look at the proposals and study them,” Levin said of the Financial Crisis Responsibility Fee. “The committee hasn’t had a chance to do it, and we will.” The committee already is considering changes to the proposal, such as basing it on a financial institution’s income rather than liabilities, panel spokesman Matthew Beck has said. Levin, 78, took control of the panel yesterday following the March 3 decision by Representative Charles Rangel , a New York Democrat, to step down from the chairmanship, at least for now, amid a House ethics committee investigation of multiple alleged misdoings. Rangel, 79, last week was admonished by the ethics panel for violating the chamber’s gift rules. Levin, who first won his House seat in 1982, ascends to the Ways and Means Committee helm as the panel is pivoting from playing a crucial role on overhauling the health legislation to addressing a series of pressing tax matters. Middle-Class Taxes In addition to considering Obama’s bank fee, the committee is gearing up to debate extending lower tax rates for the middle-class due to expire on Dec. 31, as well as address a two- month lapse in a levy on multimillion-dollar estates. The panel also is preparing to confront the growing reach of the alternative minimum tax, a levy that may surprise some 30 million households with an unexpected bill this year if it isn’t indexed for inflation. His new role also gives Levin new leverage to push a proposal he first floated in 2007 that would end the capital gains tax treatment of carried interests, the incentive-based compensation paid to managing executives at partnerships. Levin’s proposal is aimed at managing partners of private equity firms who typically receive a 20 percent share of a fund’s profits above a predetermined level. The managers currently pay 15 percent capital gains tax on this pay. Ordinary Tax Rates Levin would reclassify the income as wages subject to ordinary tax rates that currently top out at 35 percent. The proposal also would apply to venture capital firms, real estate partnerships and hedge funds that hold long-term investments that appreciate. While the House has adopted the proposal on multiple occasions to help fund tax relief legislation, it has gone nowhere in the Senate. Levin said he’d press his case directly to Senate Finance Committee Chairman Max Baucus , a Montana Democrat who has been reluctant to advance the legislation. “I hope we can have a discussion on that,” Levin said in the interview, adding he tried and failed to reach Baucus yesterday. “And we can take it apart, look at the arguments. My own view is it’s something we need to act on.” ‘Active Chairman’ Levin describes himself as the “active chairman, pending the decision of the ethics committee” on Rangel’s conduct. If Rangel doesn’t return, Levin may face a challenge from Massachusetts Representative Richard Neal next year for the seat, the Boston Globe reported today, citing aides close to Neal it didn’t identify. Levin said the committee will act this year to extend the lower rates for middle-class Americans enacted under President George W. Bush in 2001, citing “broad support” for that among congressional Democrats. In keeping with Obama’s policy, he won’t seek to extend lower rates for high-income families, he said. The committee may turn to addressing the lapsed federal estate tax first, he said. The tax expired Dec. 31, triggering a capital gains tax that applies to inherited assets in excess of $1.3 million when they are sold. The capital gains tax is calculated on a “carryover basis,” meaning it can apply to all appreciation in value since an asset such as a house originally was purchased. Estate Tax These capital gains tax rules are only in force for 2010. Unless Congress acts, the estate tax is scheduled to be reinstated in 2011 with a 55 percent rate applicable to bequeathed assets in excess of $1 million. The House in December backed a 45 percent tax rate on estates that exceed $3.5 million in value for individuals or $7 million for a married couple. Opposing a return of the 55 percent rate in 2011, Senators Jon Kyl , an Arizona Republican, and Senator Blanche Lincoln , an Arkansas Democrat, are pushing an alternative 35 percent tax that exempts the first $5 million of an individual’s estate from tax, or $10 million per couple. “I think the main point is we have to act,” Levin said. “I think this interval is not helpful; people need to be able to plan.” With a soft-spoken style and a solicitous manner, Levin will bring a new tone to a committee that has jurisdiction over tax policy, Social Security, Medicare, welfare and trade. Brother Carl Levin is the older brother of Michigan Senator Carl Levin , a Democrat and chairman of the Senate Armed Services Committee. Sander Levin represents a district in which manufacturers are based and many auto workers reside, and he is closely aligned with unions. Of his 20 top donors since 1989, 15 are labor unions, including the American Federation of State, County and Municipal Employees with $91,250 and the International Brotherhood of Electrical Workers with $90,200, according to the Washington-based Center for Responsive Politics . The top Republican on the Ways and Means panel is also from Michigan: Representative Dave Camp. Camp cited a “long and good working relationship” with Levin in a statement yesterday. One area of potential conflict, Levin’s critics say, is trade. Levin is the former head of the Ways and Means trade subcommittee, and is a leading congressional critic of a pending free-trade agreement with South Korea. While Rangel pushed the Obama administration for a commitment on when it would move another trade accord with Colombia, Levin advocated a more deliberate approach for those pending deals. Trade Agenda “Any glimmer of hope that there was for a trade agenda, just vanished,” Sean Spicer , a trade official in former President George W. Bush’s administration, said in an interview. With Rangel in place “you could always hope to go over Levin and work around him. You can’t go around the chairman.” Rob Leonard , a tax lawyer at the Washington firm Akin Gump Strauss Hauer & Feld LLP who served as chief counsel for the committee several years ago, said Levin’s “trademark” is open and honest debate that gives all views a “fair shake.” “It’s all very much on the level with him,” Leonard said. “He is far from the ‘liberal’ caricature that some may choose to paint — and as a chairman seeking consensus from a very diverse congressional audience, I expect him to be drawn to balanced policy responses to the complex problems that come before the Ways & Means Committee.” To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

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Massa’s Departure Decision Improves Republican Chances for U.S. House Seat

March 4, 2010

By Jonathan D. Salant and Heidi Przybyla March 4 (Bloomberg) — Representative Eric Massa of upstate New York, who had raised more than $1 million for an expected tough campaign this year, announced yesterday that for health reasons he won’t seek re-election. Massa, a Democrat serving his first term, said during a conference call with reporters that he is retiring because he had his “third major cancer reoccurrence scare” in December. He also is the target of a House ethics committee investigation, according to a spokeswoman for House Majority Leader Steny Hoyer . Massa’s decision strengthens the chances for Republicans to take back one of the four New York House seats they lost in the past two years. When Massa won his seat in the 2008 election, he became the first Democrat to represent the state’s so-called Southern Tier in two decades. “Any time an incumbent steps down, the odds of an opposition victory goes up,” Democratic consultant Glenn Totten said yesterday. “In this case, with the history of the district being a Republican-leaning district and given the current mood of the electorate, the chances of it going Republican are probably pretty good.” Massa, 50, was rated one of the most endangered Democratic incumbents by the three Washington-based publications that gauge congressional races, Congressional Quarterly, the Cook Political Report and the Rothenberg Political Report. Republican Contender A potentially strong Republican candidate, Tom Reed , the former mayor of Corning, New York, was gearing up to run for the seat even before Massa’s retirement decision. Massa had raised $1.1 million through Dec. 31, according to campaign finance reports. He said on yesterday’s conference call that doctors advised him to slow down, prompting his decision not to seek re-election in November. “I will now enter a final phase of my life at a more controlled pace and remain fully committed to helping the families of the 29th District ,” Massa said. “I make this decision based on being a cancer survivor who, following the advice of my doctors in Washington and in New York, cannot and will not prevent others from serving in the Congress that I hold in such great esteem.” He dismissed allegations that he had harassed his staff, and said that wasn’t the cause for his decision. The Navy veteran did acknowledge he has “used salty language.” Misconduct Allegations Hours after Massa’s announcement, Katie Grant, a spokeswoman for Hoyer, said the House ethics committee is investigating “allegations of misconduct” against the freshman lawmaker. Hoyer, a Maryland Democrat, had told a member of Massa’s office in early February that he would bring the allegations to the committee if the lawmaker or his staff didn’t, Grant said in a statement last night. “Within 48 hours, Mr. Hoyer received confirmation from both the ethics committee staff and Mr. Massa’s staff that the ethics committee had been contacted and would review the allegations,” according to the statement. It didn’t specify the allegations against Massa. House Speaker Nancy Pelosi said today that Hoyer’s staff didn’t tell her about the allegations concerning Massa. “You know what this is, Rumor City,” she said. “I have a job to do and not be a receiver of rumors.” She said at her weekly news conference that her first inkling of Massa’s retirement came via a phone call yesterday from the lawmaker telling her he had been diagnosed with cancer. “That was the first I heard of it,” said Pelosi, a California Democrat. Massa is at least the sixth Democrat representing a district that could swing to the Republicans in November who has decided against seeking re-election. All told, 16 Democrats and 20 Republicans have announced they won’t seek re-election to House seats. To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net ; Heidi Przybyla in Washington at hprzybyla@bloomberg.net .

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Sharpton Calls `Emergency’ Leaders Meeting Amid Paterson, Rangel Scandals

March 4, 2010

By Brendan A. McGrail March 4 (Bloomberg) — The Reverend Al Sharpton called an “emergency leadership” meeting tonight in Harlem to discuss how to “protect issues that are of major concern” related to New York Governor David Paterson and U.S. Representative Charles Rangel . Paterson faces charges from a state ethics panel that he violated a gifts ban, as well as an investigation by the state attorney general into allegations he interfered in the domestic- abuse case of an aide. Rangel told reporters yesterday that he asked for a leave of absence as chairman of the House Ways and Means Committee after being admonished for breaking rules on accepting gifts. The Associated Press, citing an unidentified state Democrat, reported that black Democratic leaders in Harlem will call on the governor to resign. “When a politician’s closest supporters deliver a message of that sort, it’s very hard to ignore,” said Kenneth Sherrill , a professor of political science at Hunter College in New York. “When the people you rely on tell you it’s time to go, it’s difficult to stay.” Prominent Politicians Paterson and Rangel are two of the state’s most prominent Democratic black politicians. Paterson, 55, represented Harlem in the state Senate for 21 years. Rangel, 79, in his 20th term, represents parts of Manhattan, including central and east Harlem. Sharpton, 55, the Harlem-based political activist, said in an e-mailed press release that former New York Mayor David Dinkins is among those who have been invited to the gathering at Sylvia’s Restaurant. “What’s to be served by trying to force him from office now?” Dinkins said today outside the Yale Club, according to the New York Times. Peter Kauffmann , the governor’s communications director, resigned today, saying “as recent developments have come to light, I cannot in good conscience continue in my current position.” Marissa Shorenstein , a Paterson spokeswoman, wasn’t available for comment. The National Organization for Women called for Paterson’s resignation this week, after the New York Times published a report alleging that the governor had directed two state employees to contact the woman at the center of the aide’s domestic-abuse case. The case was dismissed after the woman didn’t appear for a hearing the day after she and Paterson spoke by phone, the Times said. ‘Rush to Judgment’ Members of a black law enforcement group today criticized what they described as a “rush to judgment” on Paterson, the state’s first black governor. He took over in March 2008 after Eliot Spitzer resigned. “Why are we asking the governor to step down when these things haven’t been proven true?” said Michael Greys, a retired New York corrections officer and co-founder of 100 Blacks in Law Enforcement Who Care , at a Harlem press conference. “Let’s go with innocent until proven guilty.” Paterson became Democratic Senate minority leader in 2002, before Spitzer chose him as his running mate. Rangel is the first black to head the tax-writing committee. A New York state ethics panel yesterday said Paterson violated a ban on gifts by soliciting and taking five free tickets from the New York Yankees to the first game of the 2009 World Series. Kauffmann Testimony Testimony from Kauffmann indicated that the governor’s initial response to a press inquiry was that Paterson didn’t need to pay for the tickets because he had gone to the game on official business, the ethics panel said in a report. Paterson didn’t participate in opening ceremonies and wasn’t announced to the crowd, the report said. The Commission on Public Integrity asked state and county prosecutors to determine whether Paterson or others may have committed a crime by giving false testimony during interviews related to the tickets, “and by causing a check to be back- dated.” Paterson “intends to challenge the findings of the commission both with respect to the law and the facts,” his office said in a statement yesterday. “The governor takes this matter very seriously and intends to fully cooperate with any further inquiries or investigations, but believes the commission has acted unfairly in this matter.” To contact the reporter on this story: Brendan A. McGrail in New York at bmcgrail@bloomberg.net .

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House Democrat John Murtha Dies at Age 77 After Complications From Surgery

February 8, 2010

By Laurence Arnold Feb. 8 (Bloomberg) — John Murtha , a former Marine drill instructor turned congressman who unapologetically wielded his power to benefit his Pennsylvania district, died today. He was 77. Murtha, a Democrat, died of complications after undergoing gallbladder surgery in late January in a hospital in Arlington, Virginia. During 36 years in the House, the Vietnam veteran from Johnstown, Pennsylvania, rose to chairman of the subcommittee that approves defense spending. That perch gave him a platform to exert his knowledge and strong beliefs about the proper use of the U.S. military. In November 2005, citing increasing attacks on Americans, he called for an immediate withdrawal of U.S. troops from Iraq, a military engagement he had voted for in 2002. He was an ally of House Speaker Nancy Pelosi of California. “It’s the passing of a major political figure who was close to the speaker and always involved in Democratic legislation,” said Stuart Rothenberg , an independent political analyst based in Washington. Rothenberg called Murtha a major force in “forming American politics in jobs and spending.” Representative Norm Dicks , Democrat from Washington state, the senior most member of the Defense Appropriations subcommittee after Murtha, would be the “one most likely to succeed,” George Behan, a spokesman for Dicks, said in an interview. The House Appropriations committee headed by Representative Dave Obey , Democrat of Wisconsin, would make the final decision, Behan said. User of Earmarks Murtha’s seat on the Appropriations Committee enabled him to become one of Congress’s most adept users of the earmark process to send money to specific projects back home. The John Murtha Johnston-Cambria County Airport was among the more visible results of his taxpayer-funded largess. Murtha steered an estimated $150 million in federal funds to the airport, the Washington Post reported in 2009. Murtha’s town also became a popular place for defense contractors, which received millions in earmarks through the congressman. Some of those firms donated to Murtha’s campaign and gave jobs to his allies, the Post reported, creating a web of connections that drew the attention of federal prosecutors. Searches were carried out in January and February of 2009 at the offices of a Virginia lobbying firm and a Pennsylvania- based defense contractor that had benefited from Murtha’s earmarks. Abscam Investigation Earlier in his career, he was investigated — though not prosecuted — in the Abscam bribery scandal that led to the convictions of seven other lawmakers in the 1980s. Murtha’s use of earmarks and ties to lobbyists made him a top target of good-government groups. Citizens for Responsibility and Ethics in Washington labeled him one of the “most corrupt” members of Congress. Murtha gave no ground. “If I’m corrupt, it’s because I take care of my district,” he told the Pittsburgh Post-Gazette in March 2009. “My job as a member of Congress is to make sure that we take care of what we see is necessary.” As his congressional Web site put it, Murtha “has worked hard to bring tens of thousands of family-sustaining jobs to western Pennsylvania,” which had suffered “the widespread loss of coal and steel jobs that were the lifeblood of the area.” After Democrats won a majority of seats in the House in November 2006, Murtha ran for the No. 2 leadership post, majority leader, and was supported by Pelosi, the incoming House speaker. Murtha, who may have lost votes due to the allegations about his ethics, was defeated by Steny Hoyer of Maryland. ‘Racist Area’ Murtha won his 18th full term in 2008 even after seeming to insult his district by calling it “a racist area” where some voters might be reluctant to vote for Barack Obama . He later apologized. His committee was preparing to take up the latest war spending bill, which would fund the Obama administration’s troop buildup in Afghanistan. Murtha had expressed skepticism, saying in December he was “not sure that there’s a threat to our national security” in Afghanistan because al-Qaeda “can go any place — they don’t have to be in Afghanistan.” Murtha’s death likely creates another competitive race as Republicans try to retake the House in November. His district gave 49 percent of its vote to Obama in 2008 and 49 percent to Republican presidential nominee John McCain . John Patrick Murtha was born on June 17, 1932, in New Martinsville, West Virginia, and graduated from high school in Mount Pleasant, Pennsylvania. Drill Instructor He left Washington and Jefferson College in Washington, Pennsylvania, in 1952 to join the U.S. Marine Corps during the Korean War, serving until 1955 and becoming a drill instructor at Parris Island. In his second tour of active duty, in 1966 and 1967, he served in Vietnam as a Marine intelligence officer. His honors included a Bronze Star and two Purple Hearts. He was a reservist from 1952 to 1990 and retired from the Marine reserves as a colonel. He earned a degree in economics from the University of Pittsburgh in 1962. He began his political career as a member of Pennsylvania’s legislature from 1969 to 1974. The death of U.S. Representative John P. Saylor, a Republican, in 1973 forced a special election in February 1974 that was viewed as a referendum on the unpopular Republican president, Richard Nixon , then beset by problems including inflation and the emerging Watergate scandal. Backed by organized labor, Murtha won by just a few hundred votes. ‘Tip’ O’Neill House Speaker Thomas P. “Tip” O’Neill took a liking to Murtha and named him to the powerful Appropriations Committee. He became chairman of the defense subcommittee in 1989. Murtha was often called upon by congressional leaders and presidents to travel overseas to assess security challenges or monitor elections. In 1982, O’Neill sent Murtha to Beirut to review President Ronald Reagan’s decision to deploy U.S. Marines there as part of a multinational peacekeeping force. Murtha concluded the American troops were too vulnerable. “I’d like to get them out of here as soon as possible,” he told reporters. In 1992, he was a leading congressional critic of President George H.W. Bush’s decision to send U.S. troops to Somalia on a humanitarian mission. “The danger is we won’t be able to get them out,” Murtha warned. Murtha’s congressional Web site said of his role in the Somalia debate: “Although his advice was not heeded, history would prove him right.” Murtha and his wife, Joyce, had three children. To contact the reporter on this story: Laurence Arnold in Washington at larnold4@bloomberg.net

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Jodie Levin-Epstein: Peaceful Revolution: Paid Leave Makes Horse Sense

January 4, 2010

Vacations are good for your health. And, you don’t need to get away to any fancy Caribbean retreat to get the benefit of time-off from work. But it helps if you are a horse. In New York City, that is. The City’s Health Department has proposed new rules for those horses hitched to carriages that carry tourists around parts of town. If implemented, the horses would get 5 weeks of job-protected vacation . During their time off, the horses would continue to enjoy their standard payment — room and board, along with grooming. It is a reasonable business decision to invest in these workers since the vacation time will likely prolong their work-life and enhance their productivity. Added to the economics are the ethics of humane treatment of animals. The Health Department apparently considers the 5 weeks to be akin to a minimum labor standard. An advisory committee had urged that the horses get 8 weeks based upon ‘best practices’; in defending a shorter vacation, Daniel Kass, a department official noted, “Operators are invited to give them more.” It’s time for Congress and the U.S. Department of Health and Human Services to pony-up to the value of vacation for two-legged workers. Workers outside the federal government, that is. Federal workers are entitled to 13 vacation days starting in year one. No wonder the federal government is often viewed as a desirable employer-of-choice. For the rest of the nation’s workforce, however, no federal law provides any paid time off — and that includes vacation, holidays, and sick time. As the Department of Labor explains it, “These benefits are a matter of agreement between an employer and an employee.” One result of that ‘agreement’ is that among working parent households, fully 41 percent of those with incomes below twice the federal poverty level have no paid time off of any kind. While higher income workers tend to have paid leave, they, too, can miss out; for example 17 percent of white collar private workers have no paid vacation . And, even before the recession, what employers gave, they sometimes took away. Access to paid vacation, sick days, and holidays was less likely in 2006 compared to prior peak years. Legislation has been introduced that would begin to give the U.S. human workforce parity with the standards proposed for the Big Apple’s equine workers. A bill that would provide for paid vacations was introduced in Congress in 2009 (while all carriage horses in New York are expected to get 5 weeks, the bill in the U.S. House of Representatives for human employees would enable them to access one or two weeks, depending on the size of their employers). Other pending legislation would provide paid sick days and allow most workers to take up to 7 days in a year to treat or prevent illness, or to take care of a loved one. Numerous national organizations including MomsRising, Take Back Your Time, The National Partnership for Women and Families, and the Center for Law and Social Policy are trying to move these and related paid leave bills. Other nations provide paid time off . Nearly 160 have accepted a UN covenant which declares that all countries should “recognize the right of everyone to the enjoyment of just and favorable conditions of work which ensure, in particular, reasonable limitation of working hours and periodic holidays with pay, as well as remuneration for public holidays.” Indeed, among the world’s 15 most competitive countries , 14 provide paid sick leave, 14 provide paid annual leave, 13 guarantee a weekly day of rest, 13 provide paid leave for new mothers and 12 for new fathers according to Raising the Global Floor . Giving U.S. workers some paid time off just makes horse sense. If horses can get it, why can’t their bosses? A Peaceful Revolution is a blog about innovative ideas to strengthen America’s families through public policies, business practices, and cultural change. Done in collaboration with MomsRising.org , read a new post here each week.

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22 Former Bush Administration Officials Now Lobbying On Climate Policy

December 7, 2009

Twenty-two former Bush administration officials once responsible for climate policy are now lobbying on the climate change issue, mostly for the oil, gas and mining industries, according to a new report by watchdog group Citizens for Responsibility and Ethics in Washington. “These alumni of the Bush climate team continue to shape and confuse the debate over global warming,” said CREW executive director Melanie Sloan in a statement. “They may have changed their uniforms, but they’re still playing for the same team.” Of 120 staff officials at the White House’s Council on Environmental Quality, the Office of Science and Technology Policy, and the Environmental Protection Agency, CREW turned up 22 people who have moved on to the influence industry. Of those, 14 are registered lobbyists. The poster child for this particular revolving door is probably Philip Cooney, who resigned from his position at CEQ in 2005 after it emerged that he’d edited climate reports to play down evidence of global warming. Cooney worked for the American Petroleum Institute before joining the Bush administration, and after he resigned he took a job with API member Exxon-Mobil. CREW’s report suggests that the weakening climate change consensus among the U.S. public is due to the influence of disinformation spread by former officials like Cooney: “Through lobbying and industry-manufactured ‘grassroots’ activities, these individuals continue to influence and confuse the debate over global warming and hamper the efforts of the current administration to help establish a public consensus on this issue.” Click here for a PDF of CREW’s report.

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Corzine Seeks Presidential Aura to Lure Democrats in N.J. Governor’s Race

October 22, 2009

By Terrence Dopp Oct. 22 (Bloomberg) — New Jersey Governor Jon Corzine has stood beside President Barack Obama in Hackensack and Holmdel. He shared a stage with Vice President Joseph Biden in Philadelphia this summer and again this week in Edison. Even former President Bill Clinton got called in. With less than two weeks until the state’s gubernatorial election, Corzine is counting on the star power of the national Democratic leadership to attract the 23 percent of Democrats who said they remain undecided in an Oct. 14 Quinnipiac University poll. Obama stumped for Corzine yesterday at Fairleigh Dickinson University in Hackensack. “He’s one of the best partners I have in the White House,” Obama said during a 27-minute speech in which he said Corzine assisted in the crafting of economic stimulus legislation. “New Jersey needs to give Jon Corzine four more years.” Democrats outnumber Republicans by more than 720,000 voters across the most densely populated area in the country, where residents haven’t elected a Republican to statewide office since 1997. Corzine, 62, is the only U.S. governor seeking re-election this year, as voters blame him for a variety of fiscal woes. Until this month, Corzine trailed Republican Christopher Christie in polls. The governor caught Christie after launching ads attacking the Republican’s support for ending health insurance mandates and his links as a fundraiser for former President George W. Bush . In the spots, Corzine questioned Christie’s driving record following a 2002 traffic accident in which Christie turned the wrong way down a one-way street, hit a motorcyclist and wasn’t issued a ticket; and his ethics for giving a loan to a subordinate who worked for him when he was U.S. Attorney for New Jersey. Obama Factor Corzine, former chairman of Goldman, Sachs & Co., tied with Christie , each with about 40 percent, in this month’s Quinnipiac poll, which had a margin of error of 2.8 percentage points. Two days before the president’s July 16 visit, the incumbent trailed Christie, 41 percent to 53 percent, in a poll that had an error margin of 2.5 percentage points. Sixty-one percent of voters approved of Obama in that July poll; among Democrats, the president got a 90 percent rating. In an August poll, Obama’s approval was 56 percent, while 89 percent of Democrats liked his performance. “The tactical edge Corzine wants here is mobilization,” said Peter Woolley , director of Fairleigh Dickinson’s PublicMind polling center. “The Democratic game plan seems to be simply to outmuscle the Republicans and convince their strong and broad base of voters to stick with the party.” Biden, Clinton Earlier this week, Biden told a cheering crowd in a gymnasium at Middlesex County College in Edison that he trusted Corzine’s views on the economy so much that he had sought out the governor’s opinion on how to handle the recession. “It’s great to be here with one of the best partners that Barack and I have in the country,” Biden said. Clinton, speaking Oct. 20 to South Jersey Democrats at a ballroom in Collingswood, said Corzine’s re-election was important for the country and the state. Clinton joined the first-term governor for a second rally later that day at Rutgers University in New Brunswick. Obama rallied 3,500 Democratic voters yesterday, telling them that Corzine extended unemployment benefits for 600,000 jobless and added more than 100,000 children to health-care rolls. The campaign distributed tickets to the event. During his address delivered as the local evening news was being broadcast, Obama said he wasn’t speaking solely to those in attendance. Rather, he said, he was aiming his remarks at “all of those watching out there,” motioning to television cameras assembled on a riser. ‘Motivating Folks’ “Motivating folks to get to the polls and vote is going to be part of what we have to do,” said Joseph Cryan , head of the Democratic State Committee and an assemblyman from Union. “We do that well, but the president can always help us do it better.” Adenah Bayoh, 31, who owns an International House of Pancakes restaurant in Irvington, said she was undecided before attending the rally. She voted for the governor in 2005. Bayoh, a Fairleigh Dickinson alumnus who was drawn to the event by Obama, said she’s behind Corzine now. “Obama made some great points in that right now, people everywhere are losing their jobs and the economy is bad,” she said in an interview. “I’ve always been a Democrat, but I haven’t been that inspired in this election.” Overcoming Indifference Krishna Yalla, 24, said he was indifferent before attending the rally. Yalla, who’s unemployed after graduating from the university in May with an economics degree, said the event energized him. “For me, it was Obama,” Yalla said as he filed out of the auditorium. “To have a public endorsement from the president, who I support, is a huge push.” Christie released a Web video yesterday ahead of Obama’s visit titled “Yes We Can,” which features the president talking about the need for change. “If you want real change, start by changing governors,” Christie’s campaign said in the video description. Corzine has spent at least $16.8 million on the race, more than triple Christie’s $5.4 million, according to campaign finance data released Oct. 7. Christie, who is accepting public matching funds, has said he expected to be outspent by the governor, who is not taking public funds. The Republican is limited under state public-finance laws to $10.9 million for the campaign. Corzine spent a total of $100 million on his runs for U.S. Senate and his first race for governor four years ago. “You’ve got a lot more Democrats in New Jersey” said Maurice Carroll , director of the Quinnipiac polling institute in Hamden, Connecticut. “Are they all going to be swayed by Obama and Biden? Probably most aren’t. But some are.” To contact the reporter on this story: Terrence Dopp in Trenton, New Jersey, at tdopp@bloomberg.net .

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Lynda Resnick: Finding the Voice of Truth Amid the Noise of Old and New Media

September 21, 2009

We’re facing a crisis in our nation, and I’m not talking about the economy (which is indeed grim), or our health care system (even more grim), or Kanye West’s lack of manners (annoyingly grim). I’m talking about the state of journalism, that once-great bastion of integrity crumbling around us. A recent Pew Poll entitled “Press Accuracy Rating Hits Two-Decade Low” states that “Just 29% of Americans say that news organizations generally get the facts straight, while 63% say that news stories are often inaccurate…. In 1985, 55% said news stories were accurate.” The media world is in a free fall. The drop in combined ad pages and digital buys for newspapers was the biggest since the Depression . According to TNS Media Intelligence, magazine ad pages for 2008 were the lowest full-year counts of the decade, with 2009 year-to-date numbers already 20 percent below that. The thinner a newspaper or magazine is — due to reduced revenue from advertising dollars — the less editorial content because of the standard ad-to-editorial ratio, and the less money there is to support investigative journalism. With the rush for ratings dominating broadcast content, what used to be news has become rants from one side or the other that appeal to the basest emotions. The publishing world is teetering as it tries to find its relevance in the digital landscape. But it is the fate of journalism — no matter who serves it up — that keeps me up at night. Since the advent of the Internet — more recently compounded by blogging — everyone can be a published voice. Any cowardly, anonymous anger-monger can have an audience of thousands. That doesn’t make them a journalist any more than my throwing an onion and a few carrots into a pot of boiling water makes me Julia Child. Somewhere in this new century, it was forgotten that journalism was once considered a noble profession, one that strove to uphold the ideals spelled out by the Society of Professional Journalists in its code of ethics . Today, it has become increasingly apparent that too many television and online “writers” fail to realize what William Bernbach of Doyle Dane Bernbach stated so eloquently back in 1989, before the first blog was ever dreamed of: “All of us who professionally use the mass media are the shapers of society. We can vulgarize that society. We can brutalize it. Or we can help lift it onto a higher level.” Today’s media pundits seem more interested in seeking sensationalism than the truth. The desire to be the first to report a story now outweighs the desire to maintain integrity by performing even the most basic research of the facts. Where there was once a hard and fast standard that had to be met before an article was published, online readers often are unaware of such standards. Sensationalist stories are now “retweeted” before many take the time to read, contemplate, and research the content. The pixel has proved more powerful than the pen, giving authors the ability to attract and amass readership — and perceived credibility — with a rapidity that should frighten any discerning reader. Many of these bloggers/writers and pundits have big-name corporations (and even previous administrations) backing their less-than-scholarly works, allowing them to work under the guise of professional journalists. Worst of all, many readers are so quick to believe or be tickled by the negativity of just about any piece of content that comes through their inbox that they’re apt to disseminate it to their friends before they can verify credibility. With so many voices to choose from, who can we trust? The voice I’ve chosen to turn to is that of NPR . With a reputation for some of the finest journalism in the country, the nonprofit organization is renowned for its unbiased stance — to the point that it’s been accused of being both conservative and liberal . The fact that it both satisfies and angers both sides is a true indication of its journalistic integrity. This is why it saddened me to learn that less than 9 percent of National Public Radio’s audience actually pays to support it. Contrary to popular belief, the organization is not a government entity, meaning it is not backed by federal funding. I urge all of you — especially those listeners who have listened for free all these years — to put your money where your ear is by making a donation . If you can’t do that, at least honor its ideals by doing your own fact-checking before retweeting/reposting/adding to Digg, etc. And I call upon the bloggers, web writers, and other partisan tastemakers to look to NPR as their touchstone for integrity. Before you click that publish button, ask yourself if your post upholds the standards stated above by the Society of Professional Journalists, or that of CyberJournalist.net’s Bloggers’ Code of Ethics (which was based upon that of SPJ). If you need a shorter credo to adhere to, you can use as a guidepost the words of Joseph Pulitzer , which ring as true today as they did a century ago. “Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all, accurately so they will be guided by its light.” Lynda Resnick is the author of the bestselling marketing book Rubies in the Orchard . You can read Lynda’s business advice in her columns “Ruby Tuesday” and “Ask Lynda,” as well as ask your own business questions on her personal website.

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Obama Weighs Risking Prestige to Boost Chicago’s Olympic Bid in Copenhagen

August 13, 2009

By John McCormick and Hans Nichols Aug. 13 (Bloomberg) — President Barack Obama is weighing a trip to the International Olympic Committee’s Oct. 2 meeting in Copenhagen to make a closing argument that his hometown of Chicago should host the 2016 Summer Games. The trip would mark a rare example of a U.S. president using his prestige abroad to attract an event with billions of dollars in construction, tourism and advertising at stake. Chicago is competing with Madrid , Tokyo and Rio de Janeiro . The timing may be difficult politically because an October trip would mean Obama is out of the country just as Congress is likely to be debating his domestic priority, a health-care overhaul that could affect 17 percent of the economy. It also carries the risk he could return without delivering a victory. “We have not made a decision yet,” said Valerie Jarrett , a senior adviser, who is also from Chicago. “You can be certain that we will be well represented in Copenhagen.” Regardless of whether he makes the journey, Jarrett said the president will seek to convey to the Olympic Committee how important the bid is to him personally and to the U.S. “We are confident that we can make that as clear as crystal,” said Jarrett, who is directing the White House’s effort. For now, Obama and his advisers are guarded about sharing their strategy with rival cities, she said. ‘Want to Win’ “Telecasting our last, home-stretch strategy doesn’t seem to be prudent,” Jarrett said. “We want to win. We’re not interested in coming in second, third or fourth.” The president’s time is considered a valuable commodity, possibly complicating travel. “He has an awful lot on his plate,” Jarrett said. The prestige of his office is also a form of capital, and any trip would have to be weighed against the cost of coming home empty-handed, said Ken Duberstein , a chief of staff to president Ronald Reagan . “You don’t want to put the president in a position where he’s going to go to Copenhagen and not come back victorious,” said Duberstein, a onetime chairman of the ethics committee for the U.S. Olympic Committee. The White House needs to make the political calculus “whether or not he can win in Copenhagen with the very independent-minded IOC,” he said. Video Appeals The president already has recorded four video appeals for Chicago, the most recent in early July in which he asked African sports leaders for their support. Later that month, he raised the games in the Oval Office with Sepp Blatter , the president of FIFA , soccer’s international governing body, who is also an IOC member. Patrick Ryan , chairman of Chicago’s bid committee and founder of insurance company Aon Corp. , said his team is preparing one final pitch to the committee with an Obama appearance, and the other with him staying in the U.S. “It’s going to be decided very much at the end,” Ryan said. “And if he comes, he’ll be a positive factor.” Jarrett, meanwhile, is planning to travel to Copenhagen and is coordinating with Cabinet members and politicians from neighboring states, both Republicans and Democrats, who are backing the effort. Obama may be the best pitchman of all. He has proven popular outside the U.S., restoring opinions of his nation to levels not seen since before George W. Bush took office, according to a Pew Research Center survey release on July 23. A July Bloomberg Global Poll of financial investors and analysts found that Obama has a 73 percent favorability rating. ‘Popular Worldwide’ Having a national leader “as popular worldwide as Barack Obama is worth something,” said Duberstein. Russian Prime Minister Vladimir Putin made a successful in-person appeal in Guatemala City for the Russian ski resort of Sochi to host the 2014 Winter Games. Even the opponents of Chicago’s bid hope the U.S. president shows up in Copenhagen. Juan Antonio Samaranch Jr ., Spain’s representative to the IOC, said he would “brag for the coming years to all my friends” about a presidential meeting. Popularity alone won’t be enough to persuade the 110- member Olympic Committee. Chicago’s rivals will emphasize that the city is at a disadvantage because the U.S. is the only nation that doesn’t underwrite the cost of hosting the games, said Samaranch, the son of a former IOC president. ‘A Little Frivolous’ “He will have an impact, but I think it’s a little frivolous that he’s going to make it or break it,” Samaranch said. Chicago Mayor Richard Daley has pledged that his city will take financial responsibility for a project projected to cost $4.8 billion, a promise that has angered some aldermen and residents. The city council has approved a $500 million guarantee against operating losses, while the state of Illinois has promised $250 million. McDonald’s Corp. , based in Oak Brook, Illinois, is one of the many Chicago-area companies following the bid. The fast- food company is one of nine global Olympic sponsors with exclusive marketing rights. Obama is still deciding whether to make a separate trip to Copenhagen in December to attend a conference on greenhouse-gas emissions. The president has other options for that gathering, if he isn’t certain he can convince developing nations to adopt emissions limits. “He can always send Al Gore ,” Duberstein said. To contact the reporter on this story: John McCormick in Chicago at jmccormick16@bloomberg.net Hans Nichols in Washington at hnichols2@bloomberg.net

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Dodd, Conrad Loans Broke No Senate Rules: Panel

August 7, 2009

WASHINGTON — The Senate ethics panel cleared Sens. Chris Dodd and Kent Conrad Friday of breaking rules by getting mortgages through a VIP program, but it scolded them for not being more careful to avoid the appearance of sweetheart deals. The Select Committee on Ethics told Dodd of Connecticut and Conrad of North Dakota in separate letters that it found “no substantial credible evidence” after a yearlong investigation that their mortgages from Countrywide Financial Corp. broke Senate gift rules. The two influential Democrats got their mortgages through a VIP program for those designated as “friends” of then-Countrywide CEO Angelo Mozilo. The committee said participants in the program “were often offered quicker, more efficient loan processing and some discounts,” but it also found that those borrowers didn’t necessarily get the best financial deal available. And in both Dodd’s and Conrad’s cases, the panel said the loans they received would have been available to a wide variety of borrowers with comparable financial profiles. Both senators have said that at the time the mortgages were being written, they didn’t know they were in the so-called “Friends of Angelo” program, and didn’t think they were getting special deals. At an afternoon news conference at his Hartford office, Dodd said he was “pleased and grateful” with the committee’s conclusions, adding, “There was no sweetheart or special deal. The allegations have always been false.” But the fifth-term Democrat, whose 2010 re-election bid has been badly damaged by the mortgage scandal, also acknowledged having mishandled the allegations, waiting for months to address them in detail or release documents on his loans. “I think (that) contributed to people’s cynicism and distrust, that maybe I wasn’t telling the truth. And so I blame myself for that. That was a huge mistake I made and I paid a price for it,” Dodd said. A Republican challenger to Dodd criticized the committee findings. “Now that the World’s Most Exclusive Club has – surprise, surprise – given a pass to one of its own, we still await the day when Senator Dodd will live up to his pledge of full transparency and make his mortgage documents public,” said former Rep. Rob Simmons. Dodd in February did allow reporters to view loan documents but did not permit them to be copied. Conrad said the ethics panel’s finding “confirms what I have said all along: I did not ask for or receive any preferential pricing on my loans. While I should have shown more vigilance in the appearance of these transactions, the committee has concluded I did nothing unethical, and that is the truth.” Both senators are playing pivotal roles in shepherding key elements of President Barack Obama’s agenda through Congress. Dodd heads the Banking Committee, and is also playing a leading role in the health care overhaul taking shape on Capitol Hill. Conrad, the Budget Committee chairman, is also a major player in the health care debate, as well as in shaping legislation to curb global warming. The investigation stemmed from a complaint by the watchdog group Citizens for Responsibility and Ethics in Washington (CREW) that charged that the two senators violated Senate rules against knowingly accepting gifts. The rule has an exception for loans that are provided on terms generally available to the public. The panel also said it looked into whether Dodd and Conrad violated another rule that bars senators from using their official positions for personal gain. While it found no basis to believe Senate rules had been broken, the panel didn’t excuse the two senators’ behavior entirely. Dodd and Conrad “should have exercised more vigilance in your dealings with Countrywide in order to avoid the appearance that you were receiving preferential treatment based on your status as a senator,” the committee wrote to them. Dodd has previously said that he knew he was in a so-called “VIP” program, but thought it involved only enhanced customer service – not special deals. Conrad spoke by telephone with Mozilo when he was seeking one of his loans, but according to the letter the panel sent Conrad, he told the committee that when he learned of his VIP status, he too “assumed it was merely an employee and customer relations effort.” The panel told both senators that their eventual realization that their loans were being handled through a VIP program – and Conrad’s call with Mozilo – “should have raised red flags for you,” and prompted them to learn more about the loans, and whether they might have been special deals. The committee acknowledged it hasn’t given specific guidance on mortgages, and should do so in the future. Sen. Barbara Boxer, D-Calif., the ethics chairman, and Sen. Johnny Isakson of Georgia, the senior Republican, announced they’ve introduced legislation to require lawmakers to make “full and complete” public disclosures about their mortgages. Melanie Sloan, CREW’s executive director, all but called their panel’s findings a whitewash. “As is its practice, the Senate Ethics Committee has cleared the senators of any wrongdoing despite the fact that the senators participated in a program the committee found ‘offered quicker, more efficient loan processing and some discounts,’ ” she said in a statement. The panel of three Democrats and three Republicans said it heard testimony and pored through 18,000 pages of documents from Countrywide – which has since been bought by Bank of America – to reach its conclusions. As part of its investigation, the ethics committee heard from Robert Feinberg, the Countrywide official who handled the two senators’ mortgage deals. Feinberg told GOP investigators for another congressional panel, the House Oversight and Government Reform Committee, that both Dodd and Conrad were aware they were getting special treatment. He said it was standard practice for all borrowers in the VIP program to be told they were. A transcript shows Feinberg initially replying yes when asked if he had told Dodd that he was getting special treatment. But when asked the same question again, he said, “I don’t remember…, but, you know, it was conveyed in some way, shape or form.” Dodd got two Countrywide mortgages in 2003, refinancing his home in Connecticut and another residence in Washington. Conrad’s two Countrywide mortgages in 2004 were for a beach house in Delaware and an eight-unit apartment building in Bismarck in his home state of North Dakota. ___ Associated Press writer Susan Haigh in Hartford contributed to this report.

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