[Congressional Record Volume 157, Number 183 (Thursday, December 1, 2011)]
[House]
[Pages H8004-H8006]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
WALL STREET VERSUS MAIN STREET
The SPEAKER pro tempore. The Chair recognizes the gentlewoman from
Ohio (Ms. Kaptur) for 5 minutes.
Ms. KAPTUR. Mr. Speaker, it's no secret that Wall Street is rampant
with cases of outright fraud, backroom deals and very, very special
political access. Meanwhile, Main Street is pushing back hard against
this tide by investing in our communities and struggling to create jobs
so our economy can grow.
A steady series of probing news stories have begun to expose the
depth of corruption that precipitated the Wall Street meltdown and why
it is so hard for Main Street to recover.
Bloomberg just released a story detailing how the former Secretary of
the Treasury, Hank Paulson, provided special insider information to
well connected Wall Street executives in July of 2008, just before the
meltdown. According to Bloomberg, on the very same day the former
Secretary told The New York Times that he expected the examinations of
the Federal Reserve and the Office of the Comptroller of the Currency
into Fannie Mae and Freddie Mac would ``give a signal of confidence to
the markets,'' he informed a select group of his friends on Wall Street
later in the day that in reality, there was a plan for placing ``Fannie
and Freddie into conservatorship,'' which amounts to a government
seizure. Those firms got insider information, and one can ask, did they
then place bets to protect their interests? I bet they did.
One of the fund managers in that meeting said ``he was shocked that
Paulson would furnish such specific information, leaving little doubt
that the Treasury Department would carry out that plan.'' In the words
of William Black, law expert at the University of Missouri, ``There was
no legitimate reason for these disclosures.''
The Secretary of Treasury is supposed to be a public steward of our
Nation's financial well-being. But when he told the public one story
and then shared the inside track with his friends and colleagues from
Goldman Sachs and other large firms, he broke that trust.
{time} 1030
To be blunt, this is self-serving crony capitalism at its worst.
This is hardly the only case of special treatment of Wall Street
insiders by Washington, insiders like Paulson, who was the former head
of Goldman Sachs. Earlier this week, we saw a U.S. District Court throw
out a settlement between the Securities & Exchange Commission and
Citigroup. In 2008, Citigroup reportedly created, marketed, and sold a
fund to investors. What Citigroup did not disclose is that the bank
itself was actually betting against their own fund. This fraudulent
deal made Citigroup $160 million while costing the fund's investors
$700 million in losses, and counting.
The SEC's response to this fraud was a $285 million settlement,
slightly more than a third of the reported losses incurred by the
victims of this fraud. Citigroup was not even required to admit any
wrongdoing. The federal judge was absolutely correct to throw this case
out. The SEC's policy of allowing large Wall Street firms to walk away
from fraud cases without so much as admitting any wrongdoing is
completely inappropriate and invites more corruption.
Growing reports of fraud are staggering, and they underlie the Wall
Street dealing that has so harmed our Nation. Throughout November, we
saw headline after headline of how MF Global took money from its own
private customer accounts as it tried to stay afloat in the days before
it filed one of the largest bankruptcies in American history. There may
be as much as $1.2 billion unaccounted for. We used to call that
stealing.
The fact is our Justice Department has only a handful of FBI agents
to properly investigate the volume of corruption infecting our markets.
After reviewing the FBI's own testimonies, I introduced H.R. 1350, the
Financial Crisis Criminal Investigation Act, to authorize an additional
1,000 FBI agents and forensic experts to prosecute white collar crime,
especially Wall Street. Back in the 1990s when we had the S&L crisis,
we had a thousand agents. When this crisis started, there were but a
handful because they had all been switched to terrorism investigations.
When you look at these cases, what is astounding is just how well
connected so many of these institutions on Wall Street are to the
corridors of power in Washington. It now appears even former Speaker
Newt Gingrich was paid millions of dollars by Freddie Mac before it
went bankrupt.
At a minimum, our Nation needs an independent commission to
investigate what actions led to the eventual collapse of Fannie Mae and
Freddie Mac by which Wall Street turned over all of its toxic mortgage
paper to the taxpayers of the United States for the next three
generations.
I have a bill to do just that, H.R. 2093. I ask other Members of the
House to sponsor the Fannie Mae and Freddie Mac Criminal Investigative
Commission Act.
So while real justice for Wall Street languishes in places from
Cleveland to Toledo, Main Street America is trying to create jobs. It's
over time for Washington to get its House in order to restore
accountability to Wall Street so that full confidence can be restored
to our economy. Exacting justice for Wall Street wrongdoing is long
overdue. That task remains fundamental to economic recovery and job
growth.
[From the Bloomberg Markets Margazine, Nov. 29, 2011]
How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue
(By Richard Teitelbaum)
Treasury Secretary Henry Paulson stepped off the elevator
into the Third Avenue offices of hedge fund Eton Park Capital
Management LP in Manhattan. It was July 21, 2008, and market
fears were mounting. Four months earlier, Bear Stearns Cos.
had sold itself for just $10 a share to JPMorgan Chase & Co.
(JPM).
Now, amid tumbling home prices and near-record
foreclosures, attention was focused on a new source of
contagion: Fannie Mae (FNMA) and Freddie Mac, which together
had more than $5 trillion in mortgage-backed securities and
other debt outstanding, Bloomberg Markets reports in its
January issue.
Paulson had been pushing a plan in Congress to open lines
of credit to the two struggling firms and to grant authority
for the Treasury Department to buy equity in them. Yet he had
told reporters on July 13 that the firms must remain
shareholder owned and had testified at a Senate hearing two
days later that giving the government new power to intervene
made actual intervention improbable.
``If you have a bazooka, and people know you have it,
you're not likely to take it out,'' he said.
On the morning of July 21, before the Eton Park meeting,
Paulson had spoken to New York Times reporters and editors,
according to his Treasury Department schedule. A Times
article the next day said the Federal Reserve and the Office
of the Comptroller of the Currency were inspecting Fannie and
Freddie's books and cited Paulson as saying he expected their
examination would give a signal of confidence to the markets.
A Different Message
At the Eton Park meeting, he sent a different message,
according to a fund manager who attended. Over sandwiches and
pasta salad, he delivered that information to a group of men
capable of profiting from any disclosure.
Around the conference room table were a dozen or so hedge-
fund managers and other Wall Street executives--at least five
of them alumni of Goldman Sachs Group Inc. (GS), of which
Paulson was chief executive officer and chairman from 1999 to
2006. In addition
[[Page H8005]]
to Eton Park founder Eric Mindich they included such boldface
names as Lone Pine Capital LLC founder Stephen Mandel,
Dinakar Singh of TPG-Axon Capital Management LP and Daniel
Och of Och-Ziff Capital Management Group LLC.
After a perfunctory discussion of the market turmoil, the
fund manager says, the discussion turned to Fannie Mae and
Freddie Mac. Paulson said he had erred by not punishing Bear
Stearns shareholders more severely. The secretary, then 62,
went on to describe a possible scenario for placing Fannie
and Freddie into ``conservatorship''--a government seizure
designed to allow the firms to continue operations despite
heavy losses in the mortgage markets. . . .
shares rally
At the time Paulson privately addressed the fund managers
at Eton Park, he had given the market some positive signals--
and the GSEs' shares were rallying, with Fannie Mae's nearly
doubling in four days. William Black, associate professor of
economics and law at the University of Missouri-Kansas City,
can't understand why Paulson felt impelled to share the
Treasury Department's plan with the fund managers.
``You just never ever do that as a government regulator--
transmit nonpublic market information to market
participants,'' says Black, who's a former general counsel at
the Federal Home Loan Bank of San Francisco. ``There were no
legitimate reasons for those disclosures.''
Janet Tavakoli, founder of Chicago-based financial
consulting firm Tavakoli Structured Finance Inc., says the
meeting fits a pattern.
``What is this but crony capitalism?'' she asks. ``Most
people have had their fill of it.''
A Lawyer's Advice
The fund manager who described the meeting left after
coffee and called his lawyer. The attorney's quick
conclusion: Paulson's talk was material nonpublic
information, and his client should immediately stop trading
the shares of Washington-based Fannie and McLean, Virginia-
based Freddie. . . .
Goldman Alums
One other Goldman Sachs alumnus was at the meeting: Frank
Brosens, founder and principal of Taconic Capital Advisors
LP, who worked at Goldman as an arbitrageur and who was a
protege of Robert Rubin, who went on to become Treasury
secretary.
Non-Goldman Sachs alumni who attended included short seller
James Chanos of Kynikos Associates Ltd., who helped uncover
the Enron Corp. accounting fraud; GS. Capital Partners LP co-
founder Bennett Goodman, who sold his firm to Blackstone
Group LP (BX) in early 2008; Roger Altman, chairman and
founder of New York investment bank Evercore Partners Inc.
(EVR); and Steven Rattner, a co-founder of private-equity
firm Quadrangle roup LLC, who went on to serve as head of the
U.S. government's Automotive Task Force. . . .
____
[From the New York Times, Nov. 28, 2011]
Judge Blocks Citigroup Settlement With S.E.C.
(By Edward Wyatt)
Washington.--Taking a broad swipe at the Securities and
Exchange Commission's practice of allowing companies to
settle cases without admitting that they had done anything
wrong, a federal judge on Monday rejected a $285 million
settlement between Citigroup and the agency.
The judge, Jed S. Rakoff of United States District Court in
Manhattan, said that he could not determine whether the
agency's settlement with Citigroup was ``fair, reasonable,
adequate and in the public interest,'' as required by law,
because the agency had claimed, but had not proved, that
Citigroup committed fraud.
As it has in recent cases involving Bank of America,
JPMorgan Chase, UBS and others, the agency proposed to settle
the case by levying a fine on Citigroup and allowing it to
neither admit nor deny the agency's findings. Such
settlements require approval by a federal judge.
While other judges are not obligated to follow Judge
Rakoff's opinion, the 15-page ruling could severely undermine
the agency's enforcement efforts if it eventually blocks the
agency from settling cases in which the defendant does not
admit the charges.
The agency contends that it must settle most of the cases
it brings because it does not have the money or the staff to
battle deep-pocketed Wall Street firms in court. Wall Street
firms will rarely admit wrongdoing, the agency says, because
that can be used against them in investor lawsuits.
The agency in particular, Judge Rakoff argued, ``has a
duty, inherent in its statutory mission, to see that the
truth emerges.'' But it is difficult to tell what the agency
is getting from this settlement ``other than a quick
headline.'' Even a $285 million settlement, he said, ``is
pocket change to any entity as large as Citigroup,'' and
often viewed by Wall Street firms ``as a cost of doing
business.''
According to the Securities and Exchange Commission,
Citigroup stuffed a $1 billion mortgage fund that it sold to
investors in 2007 with securities that it believed would fail
so that it could bet against its customers and profit when
values declined. The fraud, the agency said, was in
Citigroup's falsely telling investors that an independent
party was choosing the portfolio's investments. Citigroup
made $160 million from the deal and investors lost $700
million.
Judge Rakoff said the agency settlement policy--``hallowed
by history, but not by reason''--creates substantial
potential for abuse because ``it asks the court to employ its
power and assert its authority when it does not know the
facts.'' That undermines the constitutional separation of
powers, he said, by asking the judiciary to rubber-stamp the
executive branch's interpretation of the law.
The agency said that it disagreed with the judge's ruling
but did not say whether it would appeal, or try to refashion
the settlement or prepare to begin a trial, as the judge
directed, on July 16.
Robert Khuzami, the agency's director of enforcement, said
in a statement that the Citigroup settlement ``reasonably
reflects the scope of relief that would be obtained after a
successful trial,'' and that the decision ``ignores decades
of established practice throughout federal agencies and
decisions of the federal courts.''
Citigroup said it also disagreed with Judge Rakoff's
decision, adding that it would fight the charges if the case
indeed went to trial.
``We believe the proposed settlement is a fair and
reasonable resolution to the S.E.C.'s allegation of
negligence, which relates to a five-year-old transaction,''
Edward Skyler, a Citigroup spokesman, said in a statement
``We also believe the settlement fully complies with long-
established legal standards. In the event the case is tried,
we would present substantial factual and legal defenses to
the charges.''
In his decision, Judge Rakoff called Citigroup ``a
recidivist'' or repeat offender, for having Previously
settled other fraud cases with the agency where it neither
admitted nor denied the allegations but agreed never to
violate the law in the future.
Citigroup and other repeat offenders can agree to those
terms, the judge said, because they know that the commission
has not monitored compliance, failing to bring contempt
charges for repeat violations in at least 10 years.
A recent analysis by The New York Times of the agency's
fraud settlements with Wall Street firms found 51 instances,
involving 19 companies, in which the agency claimed that a
company had broken fraud laws that they previously had agreed
never to breach. Securities law experts said that the ruling
presents the agency with a tough dilemma. In future cases, it
will have to consider the risk that another judge may be
reluctant to approve a settlement given the Rakoff ruling.
``This is clearly a case of great significance,'' said
Harvey Pitt, a former chairman of the agency who is now chief
executive at Kalorama Partners in Washington. ``It's also a
case for which there is no direct precedent Courts have been
approving settlements by government agencies without any
admissions of wrongdoing for years.''
On the other hand, Mr. Pitt noted, ``there is no suggestion
here that this decision would apply in every single case,''
because Citigroup has reached such settlements before, a
situation that sets this case apart from many Securities and
Exchange Commission settlements.
Judge Rakoff has been a frequent critic of the agency's
settlements. In 2009, he rejected a proposed $33 million
settlement with Bank of America for a case in which the
agency said the bank had misled shareholders over its
acquisition of Merrill Lynch. He eventually approved a $150
million settlement after the agency presented further
evidence of the bank's wrongdoing.
The judge also noted the difference between the agency's
settlement with Citigroup and its settlement last year with
Goldman Sachs in a similar mortgage-derivatives case. Goldman
was required to say that its marketing materials for the
product ``contained incomplete information.''
In the Citigroup case, no such facts were agreed on. ``An
application of judicial power that does not rest on facts is
worse than mindless, it is inherently dangerous,'' Judge
Rakoff wrote. ``In any case like this that touches on the
transparency of financial markets whose gyrations have so
depressed our economy and debilitated our lives, there is an
overriding public interest in knowing the truth.''
Mr. Khuzami took issue with the judge's characterization of
the settlement ``These are not `mere' allegations,'' he said,
``but the reasoned conclusions of the federal agency
responsible for the enforcement of the securities laws after
a thorough and careful investigation of the facts.''
Barbara Black, a professor at the University of Cincinnati
College of Law who edits the Securities Law Prof Blog, said
that the decision was interesting because Judge Rakoff
carefully treads the line between the deference that judges
are supposed to show to regulatory agencies while also
ensuring that the court does not simply rubber-stamp
decisions.
In a legal dispute between two private parties, they can
agree to whatever settlement they desire, Ms. Black said. But
in a case involving a public agency with consequences that
affect the public interest, there has to be some kind of
acknowledgment that certain things did occur, she added.
Duties and Functions of the U.S. Department of the Treasury
Mission
Maintain a strong economy and create economic and job
opportunities by promoting the conditions that enable
economic growth and stability at home and abroad, strengthen
national security by combating threats and
[[Page H8006]]
protecting the integrity of the financial system, and manage
the U.S. Government's finances and resources effectively.
Treasury's mission highlights its role as the steward of
U.S. economic and financial systems, and as an influential
participant in the world economy.
The Treasury Department is the executive agency responsible
for promoting economic prosperity and ensuring the financial
security of the United States. The Department is responsible
for a wide range of activities such as advising the President
on economic and financial issues, encouraging sustainable
economic growth, and fostering improved governance in
financial institutions. The Department of the Treasury
operates and maintains systems that are critical to the
nation's financial infrastructure, such as the production of
coin and currency, the disbursement of payments to the
American public, revenue collection, and the borrowing of
funds necessary to run the federal government. The Department
works with other federal agencies, foreign governments, and
international financial institutions to encourage global
economic growth, raise standards of living, and to the extent
possible, predict and prevent economic and financial crises.
The Treasury Department also performs a critical and far-
reaching role in enhancing national security by implementing
economic sanctions against foreign threats to the U.S.,
identifying and targeting the financial support networks of
national security threats, and improving the safeguards of
our financial systems.
Organization
The Department of the Treasury is organized into two major
components the Departmental offices and the operating
bureaus. The Departmental Offices are primarily responsible
for the formulation of policy and management of the
Department as a whole, while the operating bureaus carry out
the specific operations assigned to the Department. Our
bureaus make up 98% of the Treasury work force. The basic
functions of the Department of the Treasury include:
Managing Federal finances;
Collecting taxes, duties and monies paid to and due to the
U.S. and paying all bills of the U.S.;
Currency and coinage;
Managing Government accounts and the public debt;
Supervising national banks and thrift institutions;
Advising on domestic and international financial, monetary,
economic, trade and tax policy;
Enforcing Federal finance and tax laws;
Investigating and prosecuting tax evaders, counterfeiters,
and forgers.
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