SEC Celebrates as One of Its Greatest Failures Is Brought to Justice

Coming on the heels of Bernie Madoff's sentencing, the Securities and Exchange Commission (SEC) celebrated its 75th birthday party last night with a $250 per person dinner at the National Building Museum. According to Politico, the shindig was hosted and paid for by the SEC Historical Society, a 501(c)(3) nonprofit group that seeks to "contribute to the understanding of how the SEC has shaped and continues to shape U.S. and international capital markets." The menu sounded fantastic, but the donor list is less then appetizing. For instance, Politico lists Standard & Poors, the highly criticized credit rating agency, as one of the table sponsors.

To the SEC Historical Society's credit, their annual reports are quite transparent. Among the major donors listed in their 2008 report are T. Rowe Price Associates Foundation, Lehman Brothers, Goldman Sachs, Vanguard, and many law firms that represent clients against the SEC. Serving on their Board of Trustees in 2008 was the then-head of FINRA and current Chair of the SEC Mary Schapiro. Joining her on the Board are many private lawyers who started at the SEC, including the General Counsel of the Charles Schwab Corporation, the General Counsel of Duetsche Bank, and the Vice Chairman/Chief Legal Officer of a hedge fund valued at over $7 billion. Also listed on the Board is David M. Becker--formerly of Cleary Gottlieb Steen & Hamilton LLC--the newly appointed SEC general counsel and senior policy director.

In addition to raising concerns about the revolving door and conflicts of interest, POGO thinks this party is a perfect example of a regulatory agency getting too close to the industry it oversees (it also brings to mind a 2006 holiday party thrown by lobbyists and defense contractors for former Rep. Tom Davis). It's certainly a good way to keep the old boy network contact list up-to-date.

-- Eric Orenstein

Companies Getting Drunk on Bailout Programs

Although the Emergency Economic Stabilization Act (EESA) was passed last October, the media continues to report on companies that are taking advantage of tax breaks and loopholes in the government's bailout programs.

Last week, Bloomberg reported that the EESA included numerous large tax breaks that appear to be entirely unrelated to “providing stability to and preventing disruption in the economy and financial system and protecting taxpayers,” as the act was intended to do. As a result, a wide range of beneficiaries are cashing in on the Troubled Asset Relief Program (TARP), including NASCAR track builders, restaurant franchises making renovations, movie and television producers, an archery company, and companies that invest in American Samoa. As ProPublica and our friends at Taxpayers for Common Sense have also pointed out, perhaps the most controversial aid went to the British liquor company Diageo Plc, which will save about $2.7 billion over the next 30 years thanks to a generous tax break in the bill.

Meanwhile, a recent Washington Post/ProPublica investigation revealed the huge benefits that General Electric (GE) has garnered from an FDIC bank rescue plan launched last fall. The company's financial arm, GE Capital, is not a bank, yet it is “one of the world's largest and most diverse financial operations, lending money for commercial real estate, aircraft leasing and credit cards for stores such as Wal-Mart.” The company, after initially not qualifying for the FDIC's Temporary Liquidity Guarantee Program (TLGP), used its status as a prominent business lender to convince regulators to broaden the program's eligibility requirements. Since its acceptance into the program, GE has benefited tremendously and has used the loan guarantees to raise billions of dollars at low interest rates. It has been the largest beneficiary of the plan, issuing about one-fourth of all the debt supported by the program.

Additionally, the fact that GE is included in a small group of commercial enterprises also involved in banking excludes it from regulation by the Federal Reserve. Instead of facing stress tests and rules for limiting risk like banks do, GE is overseen more loosely by the Office of Thrift Supervision. In an effort to increase regulation and eliminate loopholes, the Obama administration is working to draw a firmer line between commerce and banking, making conglomerate companies choose one or the other. This would help to keep companies like GE from consistently getting the best of both worlds.

Faced with the desperate need to deal with the economic crisis last fall, programs like the TARP and TLGP were created in a hurry. But without proper oversight and transparency, it should come as little surprise that these initiatives were loaded with tax breaks and loopholes. As Treasury officials puts the finishing touches on future programs like the Legacy Securities Program, we hope they will learn from past mistakes and put additional safeguards in place to ensure that the bailout aid reaches its intended recipients.

-- Nina Brekelmans

Corrupt Politicians: Watch Your Back or Clean Up Your Act

We are pleased to learn that a new bipartisan organization has been formed to root out public corruption at the local, state, and federal level. The North Carolina-based Foundation for Ethics in Public Service uses a model that we believe in: soliciting tips from concerned insiders, whistleblowers, and the public.

POGO also relates to the Foundation's guiding principles: “first, government will always have a hard time policing itself; and second, more can be accomplished if we don't care who gets the credit.”

The website explains in more detail:

Our goal is to get results, not credit. One of the ways we will facilitate investigative reporting is by receiving and vetting tips, then passing them on to investigative reporters who expose them to the spotlight of media coverage. In other instances, investigative reporters will enlist our help to dig deeper when their instincts tell them there is more to the story, but they simply lack the time or resources to pursue the story. In those cases, we will investigate further and then hand the story back to the reporter who provided us with the tip in the first place.

Since launching their website on June 13, the group has already received 20 tips, which they will vet and pass along to investigative journalists and law enforcement agencies.

When I spoke with staff at the Foundation, they told me that since news went out nationally about their group, they have received tips from Virginia, Michigan, and California on corruption at universities, in law enforcement, and at the U.S. Attorney’s Office.

-- Ingrid Drake

Barack Obama's Economic Team: Change or Plus Ça Change?

--This guest post was written by Michael Collins, a POGO Blog reader from Scotland.--

It was in a New Hampshire speech in June 2007 that presidential candidate Barack Obama outlined his commitment to an ethical White House:

“When I am President, I will make it absolutely clear that working in an Obama Administration is not about serving your former employer, your future employer, or your bank account - it's about serving your country, and that's what comes first. When you walk into my administration, you will not be able to work on regulations or contracts directly related to your former employer for two years. And when you leave, you will not be able to lobby the Administration throughout the remainder of my term in office.”

Many opposition leaders saw this as a typically opportunistic and unrealistic promise, yet, upon taking office, one of President Obama's first moves was to sign an Executive Order on January 21, 2009, entitled 'Ethics Commitment by Executive Branch Personnel,' which required staff members to make a pledge that included:

“Revolving Door Ban All Appointees Entering Government. I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts.”

Nevertheless, many members of Obama's team have relations with businesses before the government, potentially undermining Obama's Executive Order--particularly those people involved in the oft-criticized area of economic policy. Given the current circumstances, in which the government is battling to overcome the financial crisis, such glaring ethical inconsistencies within the corridors of power will raise eyebrows for those who do not fully trust the government's handling of the economy.

Much has been made of the role of Timothy Geithner, Secretary of the Treasury, and Larry Summers, Director of the National Economic Council and Assistant to the President for Economic Policy. But by focusing on these well-known figures, one may be overlooking the larger picture regarding the inextricable link between President Obama's economic team and Wall Street. One example of this link is the man confirmed as Deputy Treasury Secretary on May 18, Neal S. Wolin. On the face of it, Mr. Wolin looks like a logical appointment, having previously occupied the post of General Counsel at the Treasury from 1999-2001. However, the intervening years prove more intriguing. Before joining the Obama team as Deputy Counsel to the President for Economic Policy in February, Wolin was President and Chief Operating Officer for Property and Casualty Operations of the Hartford Financial Services Group. It is interesting to note that just two weeks after his White House nomination, Treasury announced that it would extend TARP to cover life insurance companies. One of the first insurers to apply for TARP funds was none other than the Hartford Financial Services Group, which in January had its application to become a savings and loan holding companies approved by bank regulators, and in June received $3.4 billion in funds. Wolin's appointment was confirmed by the Senate in May, but his new role raises concerns about his compliance with the aforementioned two-year order made by President Obama, given that in his post, Mr. Wolin is likely to play a key role with Secretary Geithner regarding the distribution of TARP funds.

Mr. Wolin is not the only member of the Obama economic team whose work history raises questions. On March 28, the president announced his intent to nominate George Madison as General Counsel at the Treasury Department. While Madison's appointment, pending Senate confirmation, was applauded by many, one look at his employment record suggests that Madison may not be the right person for the job after all if he's limited in his work. Mr. Madison is a former Executive Vice President and General Counsel at financial services firm and retirement fund TIAA-CREF. The two-year recusal may again have been disregarded by the president when making this selection, given that at the beginning of April, it became apparent that TIAA-CREF would have a direct financial relationship with the Treasury Department due to the company's announcement that it would participate in the TALF program (the Term Asset-Backed Securities Loan Facility), a program to provide low interest rate loans to investors to finance the purchase of asset-backed securities.

Here are some more Treasury appointments which will dismay champions of government ethics:

• Kim N. Wallace, Assistant Secretary of Treasury, Legislative Affairs. Mr. Wallace was a managing director and chief political strategist at the now-defunct Lehman Brothers until 2008, before moving on to become a managing director at Barclays Capital.
• Herbert M. Allison, Assistant Secretary for Financial Stability. President and Chief Executive Officer of Fannie Mae from September 2008 until his appointment. Previously worked as Chairman, President and Chief Executive Officer of TIAA-CREF from 2002 until his retirement in 2008.
• Michael Froman, Deputy Assistant to the President and Deputy National Security Advisor for International Economic Affairs. Financial disclosure forms show he received more than $7.4 million dollars from Citigroup, where he had worked, from January 2008 until he joined the Administration.

While it is understandable that the White House should want the cream of the financial crop to work to solve this generation's biggest financial crisis, the administration's cozy ties to Wall Street are likely to restrict its activities and anger voters whose confidence in the government's economic policy has waned in the light of auto industry bailouts and bonus scandals. The sheer number of Treasury staff who until recently received a paycheck from the same financial institutions they are now expected to monitor and distribute bailout money to reduces the public's faith in the Obama Executive Order, which pledged that the government wouldn't be directed by personal or corporate interests. All of this is very worrying for a Treasury which, during the AIG bonus scandal, was accused of dishonesty. Moreover, the appointments leave President Obama open to the charge that he has left the wolf to guard the hen house.

In a recent article for The Atlantic, former IMF Chief Economist Simon Johnson spoke of the need for the White House to take on Wall Street to salvage America's economic future. Looking at the current make-up of Obama's economic team, it would seem that Wall Street has already won that bout--leaving the taxpayer to pick up the pieces. After all the campaign promises, it appears that “Plus ça change…” is a more apt slogan for this White House.

-- Michael Collins
michael.mc.collins@gmail.com

Morning Smoke: F-22 Stealth Fail

Lockheed engineer: F-22 Raptor Stealth tech is 'defective' [The Register]

More Intelligence Oversight Advised [The Washington Post]

House Joins Amtrak IG Probe [Federal Eye]

A Belated Presidential Signing Statement [The Volokh Conspiracy]

Pushing Culture Change [Air Force Magazine]

Requiem for the Whistleblower Protection Act [Federal Diary]

Money for Nothing [OMB Watch]

Open government advocates map out future of citizen governance [Government Executive]

Reducing Government Secrecy: Finding What Works [Secrecy News]

Is PPIP Still Necessary? An Update From Inside Treasury [The Stash]

Former Lockheed Martin Engineer Calls Fraud on F-22 Stealth

As the fight over whether to continue production of the F-22 rages on, a recently unsealed qui tam lawsuit raises major questions about its stealth capabilities, one of the key air-superiority features of the fighter jet. If the allegations are true, the justification for the whole program may be in question.

The lawsuit, filed by a Materials and Process engineer specializing in stealth (also known as low-observable materials), accuses Lockheed Martin of fraudulently developing the stealth capability of the F-22 and falsely portraying to the Air Force that the stealth coating on the fighter met specifications. The engineer, relator Darrel O. Olsen, also alleges that the management at Lockheed Martin directed him not to speak to the Air Force about the problems with the coating, and that his advice to modify the coatings or purchase different coatings to meet specifications were ignored due to concerns with meeting contract milestones. While the relator in the case left Lockheed Martin in 1999, the suit claims that third-party sources report that the stealth capability of the F-22 remained dysfunctional through at least 2004, with Lockheed Martin knowingly using defective coatings and never fully disclosing the low observable system defects to the Air Force.

This of course is not the first time that the real and practical capability of the stealth of the F-22 has come into question. Just last February, POGO reported that the maintenance requirements for the stealth capability significantly reduced the F-22's mission capability. As we said at the time, we believed that this may have been one of the primary reasons why then-Defense Department Acquisition Chief John Young said that the F-22's mission capable rate was too low to waste additional taxpayer dollars on further procurement.

-- Mandy Smithberger

Morning Smoke: More Problems for PPIP

Wary Banks Hobble Toxic-Asset Plan [The Wall Street Journal]

Shock and Audit [Mother Jones]

Fixing Abuses of State Secrets [The Washington Post]

No Way Out: Treasury And The Price Of TARP Warrants [The Baseline Scenario]

Stimulus oversight board takes waste and fraud prevention steps [Government Executive]

How a Loophole Benefits General Electric in Bank Rescue [The Washington Post/ProPublica]

FOIAing the Fed: The AIG Bankruptcy Negotiations [Zero Hedge]

Financial Regulation: Industry Objections Increasing [BusinessWeek]

Acquisition chiefs brace for a busy year [Government Executive]

DOE Closes Door to Journalists, not Lobbyists, at Recent Event

The June 29, 2009 issue of the Nuclear Weapons & Materials Monitor has a very disturbing article, “DOE's New Transparency Policy--A Closed Door,” about how journalists were told to leave the room when a senior level DOE official spoke to a group of lobbyists and private interests. Below is a summary of the article:

Raising questions about the Department of Energy's committed to its oft-stated pledges of openness and transparency, journalists were told to leave the room shortly before new Deputy Energy Secretary Dan Poneman was to speak at this year's Energy Facility Contractors Group meeting in Washington last week. While no explanation was given at the time, according to those present, the move was apparently intended to ensure that journalists not only didn't cover, but couldn't even hear, a routine address on DOE's priorities under the Obama Administration and efforts to address climate change. In what one can only hope was meant with a sense of irony, Poneman reportedly also stressed the need for improved transparency at DOE in a speech closed to the news media. Poneman was the only DOE official whose remarks journalists were not allowed to cover at last week's meeting, which was also attended by Under Secretary for Science Steven Koonin, Assistant Secretary for Environmental Management Ines Triay and other DOE officials....Last week's incident seems to run in the face of DOE's efforts to be more transparent, which have gone into overdrive since the Department received billions of dollars in additional funds through the American Recovery and Reinvestment Act. To ensure that the funds are used without suspicion, DOE has flooded its Web sites with reports on how the money will be used, has posted accounts of every meeting between officials and lobbyists concerning the stimulus funds and even, on occasion, instructed lobbyists to leave public meetings when the Recovery Act was to be discussed. It is the latter that heightens the irony of last week's incident, given that a number of lobbyists representing DOE contractors were allowed to hear Poneman's remarks, while members of the media, who would disseminate them to a wider audience, were pushed away.

-- Ingrid Drake

Is SASC Raiding JSF Funds to Buy More F-22s?

POGO was obviously disappointed to see that the Senate Armed Services Committee (SASC) chose to go against Secretary Gates and the President by including $1.75 billion for the procurement of an additional seven F-22s--a decision that committee Chair Carl Levin (D-MI) and Ranking Member John McCain (R-AZ) have resolved to fight. But after reviewing a summary of the whole committee mark up, I was genuinely confused about one of the plans to cut $146 million from the research and development for the Joint Strike Fighter (JSF) "to eliminate excess management reserves in the program." Beyond my surprise that any weapons program would have excess money, this is an account that has historically experienced shortfalls.

For example, in March 2008, the Government Accountability Office (GAO) reported that the JSF program was spending their management reserve faster than budgeted in order to control development costs. And as POGO reported last June, these cost overruns and raiding of the management reserve were likely a consequence of poor management of costs that the Defense Contract Management Agency (DCMA) found at Lockheed Martin's Fort Worth, Texas facility. But even more recently, the GAO reported last month that JSF development "will cost more and take longer to complete than reported to the Congress in April 2008" (emphasis POGO's). Sources have also recently told POGO that funding in the management reserve is dwindling, not increasing.

The JSF program--like many acquisition programs--has had a long history of overpromising cost savings that have failed to materialize. But management reserves are meant to be used to address unexpected issues, and for a program that still has far to go on its testing, this does not seem like the account to raid in order to help offset procurements that DoD has said that they don't want.

In the meantime, the Air Force is continuing to press Congress not to continue to fund the F-22: "The Congress still has an opportunity to take a deep breath and really determine whether their judgment to proceed here is better than that of the secretary of defense, the chairman [of the Joint Chiefs of Staff], and the rest of the defense leadership," Air Force Secretary Michael Donley told the Wall Street Journal. "We're not going to mortgage the future of the Air Force on one airplane."

-- Mandy Smithberger

UPDATE: Jen Dimascio at Politico has more details on how additional procurement of the F-22 may undermine the success of the Joint Strike Fighter:

[O]fficials for the JSF program say that continuing F-22 production could leach funding for about 50 Joint Strike Fighters. And Pentagon officials are worried that reducing the number of Joint Strike Fighters could raise the cost of the program by reducing expected discounts for buying in bulk.

And as she notes, it's worth remembering that both advance F-22 procurement and spending that would seriously disrupt the F-35 program will result in the President's advisers recommending a veto of the National Defense Authorization Act.

Checking Up on DPAs, NPAs and Corporate Monitors

As readers of this blog know, POGO is very concerned about the Department of Justice's (DOJ) new methods of prosecuting corporate crime. U.S. attorneys are increasingly abandoning traditional prosecutions in favor of negotiating deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs) with companies accused of wrongdoing and requiring the companies to hire corporate monitors to make sure they fulfill those agreements. Is justice being served by allowing companies accused of such crimes as tax evasion, securities fraud, health care fraud, and bribery to negotiate their way out of prosecutions? Are U.S. attorneys using corporate monitor appointments to reward cronies instead of making sure companies stay in line?

Congress has the same concerns. Yesterday, the House Judiciary Committee, Subcommittee on Commercial and Administrative Law held the latest in a series of hearing on DPAs, NPAs, and corporate monitors. Among the witnesses invited to testify was the Government Accountability Office (GAO), which presented its preliminary findings in an ongoing review of DOJ's use of these new prosecutorial tools, and former New Jersey U.S. Attorney Christopher Christie, who inadvertently helped bring this issue to the forefront two years ago when he helped his former boss, ex-Attorney General John Ashcroft, obtain a lucrative corporate monitor deal.

According to GAO, DOJ has negotiated 140 DPAs and NPAs since 1993, with the vast bulk occurring since 2003. GAO sees a lack of consistency in prosecutors' use of these agreements. In March 2008, DOJ issued guidelines on DPAs, NPAs and corporate monitors, but these guidelines are not being followed consistently. Corporate monitor appointments, which the guidelines carefully spell out to help U.S. attorneys avoid the appearance of cronyism, are still largely a secretive matter because DOJ does not require prosecutors to document the process by which monitors are chosen. The final results of GAO's review of DPAs and NPAs will be issued later this year.

Although there has been marked progress regarding transparency and accountability in the use of DPAs, NPAs, and corporate monitors since the John Ashcroft incident, both Congress and DOJ realize more needs to be done. As Judiciary Committee Chairman John Conyers, Jr. (D-MI) told those present at yesterday's hearing, “I hope today's witnesses will be able to assure me that these agreements do not result in just 'a slap on the wrist,' but instead lead to meaningful deterrence and the prevention of corporate crime. The goal of these agreements should be to cause corporations to actually reform their behavior.”

-- Neil Gordon

Morning Smoke: SASC Disregards Veto Threat, Approves Funding for More F-22s

SASC OKs More F-22s [DoD Buzz]

Bernanke Blasted in House [The Wall Street Journal]

More Headaches for FCS Managers [Ares]

Public Input Sought on Classification Reform [Secrecy News]

Pending OLC Opinion Request On Geithner's Power To Supervise The TARP IG [The Volokh Conspiracy]

Fed Extending Many Emergency Lending Programs [The Washington Post]

Members of U.S. House Financial Services Committee snapped up or dumped bank stocks as bottom fell out of market [Cleveland Plain-Dealer]

The FOIA Process: Still as Archaic as Snail Mail [Real Time Investigations]

The Challenge of Regulating Derivatives [The New York Times]

Setting the Record Straight

Many in the media and Congress are still demanding answers from the White House on the removal of Corporation for National Community Service Inspector General Gerald Walpin. Some have even identified a pattern of political meddling, accusing the administration of infringing on the independence of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and other IGs at the International Trade Commission, Amtrak, and the Library of Congress.

We take these allegations very seriously, but after hearing some of the accusations being leveled at the White House, we'd like to clear up a few misconceptions.

This morning, The Wall Street Journal ran an opinion piece subtly entitled "Abolish the Inspector General." In the Journal’s view, the media has given President Obama a free pass on the removal of Walpin and the possible infringement on the SIGTARP’s authority, whereas President Bush was repeatedly slammed with front-page stories about his administration's political meddling. This somehow leads the Journal to conclude that IGs should be eliminated altogether:

Can we suggest an alternative? Abolish the IG position across the government. IGs were chartered by Democrats when Republicans kept winning the executive branch. While some of them sometimes produce valuable work, mostly they answer to Congress by teeing up pseudoscandals and serving as witnesses for the prosecution. Their probes do nothing to curb federal spending, so why waste the money?

Mr. Obama professed to love the Inspectors General as a Senator, and he cosponsored legislation that bolstered their autonomy and required the president to give Congress a month's notice and a reason before firing an IG. Either the administration ought to abide by its own rules or get rid of the office.

Say what?? Even if you accept the argument that the media has failed to hold the administration accountable for the latest IG controversies, it's a pretty big leap to conclude that all IG offices are worthless and should be abolished.

There are two points to consider here. First, while POGO would be the first to admit that IGs could take many steps to improve their effectiveness, the Journal’s claim that IGs "do nothing to curb federal spending" is simply untrue. The Government Accountability Office (GAO) recently examined the monetary accomplishments of presidentially-appointed IGs in fiscal year 2007, and found that every dollar set aside for the IGs resulted in an average of $9.49 in identified savings for the taxpayer (see Appendix I).

Second, we disagree with the Journal’s claim that the administration failed to abide by its own rules on removing IGs. We’ve said it before, and we’ll say it again: the IG Reform Act of 2008 requires the president to provide an explanation to Congress 30 days before removing or transferring an IG. There’s nothing in the law that says it has to be a good reason. So when President Obama told Congress that he no longer had "the fullest confidence" in Walpin, he did technically follow the letter of the law. We don’t fault those who are demanding a better explanation, but if that’s really what Congress wants, they should amend the IG act to include a provision in the House’s version of the bill stating that the president can only remove an IG for a specified cause.

On another note, we read in Federal Eye this morning that Senator Charles Grassley (R-IA) is also concerned that the stimulus legislation contains a provision that will allow the Recovery Act Transparency and Accountability Board (RAT Board) to meddle with an IG’s investigation. He’s worried this will have a “chilling impact upon the independence” of IGs.

It’s no secret that we’re big fans of Sen. Grassley (a.k.a. the Watchdog’s Watchdog), but we have to respectfully disagree with him on this one. As we noted a few months ago, Phyllis Fong, Chair of the Council of the Inspectors General on Integrity and Efficiency, has already explained to Congress why these concerns are unfounded: 1) the RAT Board is composed entirely of IGs; 2) the Board is chaired by former Interior IG Earl Devaney, who has dedicated his career to investigating tough cases; and 3) another provision in the Recovery Act (Sec. 1527) explicitly recognizes the independence of IGs, and clarifies that they can deny any request made by the Board to initiate or terminate an investigation.

There are still many questions to be answered, especially about the administration's decision to remove Walpin and challenge the authority of the SIGTARP, and we applaud those in Congress and the media who are trying to get the bottom of it. But it’s important to keep the facts straight, and we’re concerned that some of the administration’s critics are starting to stretch the truth in order to make their point.

-- Michael Smallberg