Wednesday, August 21, 2013

Congressional Travel Junkets or The Perks of Being A Legislator

“Before a Cat will condescend
To treat you as a trusted friend,
Some little token of esteem
Is needed, like a dish of cream…”
                             
                                          -T.S. Eliot

Let’s take a moment to discuss the time honored tradition of the Congressional travel junket. For those of you not fully aware of what a travel junket is exactly let me answer it three ways:

If you’re a Senator or Congress member pressed by the (always uncomfortable) question, you’d answer that a travel junket is a useful venture in which a Senator or Congress member must travel to a location on a fact finding mission to better represent their constituents and country as a whole.

If you’re a tax payer or a constituent, a travel junket is a trip taken by an elected official (and often their spouse or other family member) for the ostensible purpose of hands on education regarding some pending legislation. At times you foot the bill. At others, some private entity does. Either way, in most cases you get nothing of value.

If you’re a lobbyist or corporation or special interest of any sort, a travel junket is a useful tool in which, by covering the flight and other associated costs for what amounts to a vacation, you are given extended access to and many would argue, considerable influence over a particular lawmaker. The investment can be expensive, but the return is generally well worth the expenditure.

The travel junket became a point of discomfort for many voters in 2006-2007 following the discovery of disgraced lobbyist Jack Abramoff’s frequent use of junkets to lord influence over a number of elected officials. These fact finding missions included hard hitting research such as rounds of golf at Scotland’s famed golf course, St. Andrews, and trips to the Fiesta Bowl and Super Bowl. In actuality, those are just some quick highlights. The list of absurd Abramoff coordinated trips is fairly lengthy. Of course, following the public revelation and the eventual indictment and conviction of Abramoff, all of these trips were deemed either demonstrably illegal or, at the very least, gross misappropriations of an official’s time. Congress passed a bill reigning in gifts, meals and travel packages from lobbyists and the number of congressional junkets fell off a cliff—dropping from an all time high of nearly 5,000 trips in 2005 (at a cost of nearly $10 Million) to 1,846 trips the following year. The bill limited trip length on foreign travel to seven days and domestic travel to four days but also allowed for—wait for it—some exceptions. These exceptions included the allowance of educational and charitable groups to finance trips for elected officials.

In completely unsurprising fashion, it didn’t take long for lobbyists and lawmakers to figure out the best way to utilize the exceptions to their full extent. As an article in the Columbia Journalism Review explained recently:

The arrangement works like this: a congressional caucus—an official group of lawmakers (there are many) with common characteristics or interests, such as the Congressional Black Caucus or Blue Dog Democrats or the Congressional Marcellus Shale Caucus—sets up a charitable organization. That organization, in turn, seeks donations, which do not have to be disclosed. In addition to its good works, the charitable entity then organizes events, such as conferences or retreats, in which the caucus members rub shoulders with contributors. The nonprofit can invite special interests—corporations, unions, and others—to fork over large donations to sponsor and participate in these events.

So, not only have lawmakers figured out a way around travel junket reform, they’ve also figured out a way to turn their vacations into a fundraising tool. Nice.

Perhaps the most ostentatious abuse of this new “charitable” junket system came in the summer of 2011, when Eric Cantor arranged for eighty—eighty!—House members and their families to visit Israel through a charity affiliated with the pro-Israeli lobbying group American Israel Public Affairs Committee. This massive “fact finding mission” was capped off quite embarrassingly, with a (quite possibly drunk) Kansas Representative Kevin Yoder taking a late night skinny dip in the Sea of Galilee.

So a Congressman quite possibly got drunk, most definitely got naked and then went for a swim in the body of water Jesus supposedly walked on. It’s embarrassing and completely unprofessional for sure but not much else, right? Well, the real problem with Mr. Yoder’s naked dip into biblical waters stems from the way in which it was discovered. Undoubtedly, Congressman Yoder’s transgressions would likely have gone undiscovered by the press and general public had it not been for its documentation in an FBI probe into the trip over misrepresentation of expenses by some people on the trip.

As it turns out, nothing provably criminal came from the FBI probe but that is more likely due to the fact that there is a fine line between illegal and unethical and many of these travel junkets seem to exist comfortably in that narrowest of spaces. I won’t bother offering up conjecture on the absurd or unethical activities of the AIPAC junket. Instead, let’s look at Doug Thompson’s recollections of the travel junkets he attended as a staffer for the House Committee on Science and Technology back in the late 80’s:

…On such “official” trips funded by taxpayer dollars, I saw members of Congress get drunk and pass out, escort young women to their hotel rooms for the night, lose their “per diem” payments and more at casinos and engage in other antics that wouldn’t set well with folks back in their home districts.  One member bragged about getting a bl*w job from a female employee of the American Embassy in Paris.  Another claimed to have bedded a young lady who worked for the Embassy in London.
Of course, all of these junkets were called “fact-finding” missions but they were, in reality, taxpayer-funded vacations where Congressional wives shopped at the American Embassy stores, paying wholesale prices for French perfume, Italian leather goods or duty-free booze.  I still own a gold Heuer watch that I bought at one Embassy store for about 40 percent of what it would have cost in a jewelry store.
On the flight home from the Paris Air Show in 1985, the largesse from shopping sprees overflowed the cargo holds of the Air Force KC-135 that provided air transportation so some of it was packed into the restrooms of the plane, leaving just one for use on the long flight…

Of course this was more than twenty years ago but, aside from the increase in privately funded junkets, I doubt much has changed. The travel junket is just one of the perks of being an elected official and that is unlikely to change any time in the near future. Since 2000, the legislature has taken over 36,000 privately funded trips at a cost of approximately $83 million. (They’ve taken plenty of tax funded trips as well, though that is a cost more difficult to pin down.) And while the structure of privately funded travel junkets may have changed since 2006, the purpose is still the same. The travel junket is merely a means of lobbying and influence peddling for special interests outside of Washington—the proverbial dish of cream, if you will.   

Tuesday, August 6, 2013

Did "Fabulous Fab" Take A Dive For His Bosses?

Note: Normally, I focus on corruption on the government side of the equation, but this recent verdict I think points out the systemic corruption that is occurring in the United States' financial industry. I felt it was important enough to cover it, even if it seems slightly off topic for this blog.

The US Securities and Exchange Commission gave themselves a big pat on the back over last week’s conviction of “Fabulous Fab” Fabrice Tourre on securities fraud. Tourre was the only individual found guilty in the convoluted, high-dollar ABACUS scandal—a case in which the investors Tourre sold the investment vehicle to were told it was financially sound and intentionally made unaware of the toxic subprime mortgage securities being bundled into its portfolio; all the while the party responsible for the ABACUS 2007 AC-1 creation was betting against it.

Following the verdict, Matthew Martens, the SEC’s overseeing attorney on this case, said, “If this doesn’t convince people we can win these cases, I don’t know what would”. I'm not sure it's that simple though.

Yes, the SEC should be happy that it walked away with this conviction, but it seems much more likely that Fabulous Fab, while certainly guilty, was essentially a sacrificial lamb—a mid-level asset that was jettisoned as soon as it became advantageous for folks higher up the food chain. After all, what happened to the person who gained the most from the ABACUS Scandal, John Paulson; the man who commissioned the creation of ABACUS and who played a significant role in the portfolio’s content selection?

Let’s take a quick look at how the scandal actually broke down:

In the mid-2000's John Paulson approaches Goldman Sachs with $15 million to develop a CDO—an investment product based on collateral assets bundled together, most commonly property mortgages. We now know that Paulson, who was already famously bearish on the housing market at that point, wanted this investment product created specifically to be a failure. So, during the portfolio selection, Paulson loads it to the brim with sub-prime mortgages. In fact, his selections were so bad that less than one year following the introduction of ABACUS, 99% of the residential mortgages in the portfolio had been downgraded.

After Goldman created the CDO and let Paulson fill it with ridiculously bad paper, they sold it to investors without accurately disclosing its actual contents. According to the SEC filing:

Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

Goldman made it appear as if they would have an objective third party (ACA Management LLC) in charge of portfolio assignment and management, but that simply wasn’t the case.

GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process.

It’s so important to remember: having investors pour their money into the CDO with the intent of it being profitable is the only way that Paulson had the opportunity to make a fortune shorting the fund.

Goldman then sold the fund to IKB Deutsche Industriebank AG and this is where the SEC was able to scoop up its first victory. Goldman eventually had to concede that there had been omissions of fact and that IKB had not been made adequately aware of Paulson’s position in the portfolio selection. Goldman of course argued that, regardless of their inherent fiduciary responsibility, researching the details of the fund purchase ultimately fell on IKB. That argument fell flat and Goldman had to pay a $550 Million penalty.

So IKB gets burned, investors get burned, Goldman gets caught red handed and pays a fine that allowed them to avoid any admission of guilt or criminality (pretty much standard operating procedure in big financial cases), Fabrice Tourre is indicted and found guilty, and John Paulson walks away unscathed with a claim of plausible deniability and a billion—billion with a B—dollars added to his ledger. Something isn’t quite right here.

Look, I don’t think that anyone with any knowledge of the case is going to say that Fabrice Tourre was innocent. He wasn’t. He knowingly misled investors. But my question is this: at the behest of whom?

John Paulson wanted that CDO to fail. He specifically created it and loaded it with toxic mortgages to do just that. But he also knew that he had to have enough investors thinking that it was a wise investment in order to sell it short and reap a windfall. It takes quite a leap of logic to believe that Paulson had no influence in the matter in which it was marketed or, in the very least damning interpretation of events, that he was completely unaware that Goldman was marketing it dishonestly.

Unfortunately, the SEC never attempted to flesh out the obvious assumption: that Paulson and Goldman (via Tourre) were effectively co-conspirators in what amounts to a massive swindle. I don’t know exactly why they didn’t pursue Paulson but I feel comfortable in speculating that he and executives at Goldman, either directly or indirectly (with a calculated level of cooperation with the SEC), offered up Tourre as a sort of sacrifice to a regulatory body that a disgruntled American public has largely deemed a failure in its prosecution of high level financial criminals following the 2008 financial crisis.

What is equally perplexing is the alacrity with which financial booby traps like ABACUS are constructed. Don’t get me wrong, I’m not necessarily against behavior like stock shorting. It makes sense for an investor to be able to look at a failing company and say, “I’m willing to place my money on the fact that this company is failing worse than people realize”, but ABACUS was a completely different animal. ABACUS was a trap for unwitting investors, intentionally created to fail while allowing those in the know to bet on its imminent failure. How the creation of a financial investment product meant to intentionally fail doesn’t fall into the category of fraud is beyond me. It should be and anyone involved should be held accountable.

His name is John Paulson. His name is John Paulson. His name is John Paulson...






Sunday, August 4, 2013

Goldman Sachs and JP Morgan Manipulate Commodity Prices While the SEC Cheers Them On.

This week, I contributed an article to The Capital Press. You can read it here.

Here's a quick excerpt:

It’s not exactly controversial to say that the integrity of the SEC—the institution which holds primary responsibility for enforcing securities laws and regulating the financial industry; the country’s front line of defense against financial wrongdoing—has been compromised by revolving door politics. Just like many politicians and staffers on Capitol Hill have been influenced by the promise of cushy positions in lobbying or law firms following their exit from public life, many financial regulators have also been rendered ineffective under the mantle of personal financial security promised to them by the same institutions they are charged with overseeing.