[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.

                          ____________________