George Bush

Former White House Aide Pleads Guilty To Bilking Government-Funded Group

Zachary Roth | December 19, 2008, 4:38PM

Felipe Sixto -- the former aide to President Bush charged with stealing from a government-funded agency that works for democracy and human rights in Cuba -- pleaded guilty today to theft from a federally aided program, reports the Associated Press

Sixto resigned in March from his White House job as special assistant to the president for intergovernmental affairs.

Before that, he had worked as chief of staff of the Center for a Free Cuba, from which he stole more than $579,000 by overcharging the center for radios and flashlights, according to the Justice Department.

His sentencing is set for March.

David Safavian

Safavian Found Guilty Of Lying to Feds

Zachary Roth | December 19, 2008, 1:55PM

More fallout from the Jack Abramoff investigation, nearly five years after the first hints of the scandal first broke.

The Associated Press reports:

David Safavian was found guilty of one count of obstruction and three counts of making false statements to investigators. Each count carries a maximum penalty of five years in prison.

Safavian, the former top procurement official at the White House, was on trial for lying to investigators about his relationship with disgraced lobbyist jack Abramoff. His 2006 conviction on similar charges had been overturned.

AP adds:

Safavian and his lawyers decided this week not to put on a defense, ending their case without calling a single witness or without Safavian testifying.

Chris Cox

Cox "Worked to Dismantle The SEC," Says Commission Vet

Zachary Roth | December 19, 2008, 1:32PM

There's no longer much debate about the fact that the SEC badly slipped up by failing to catch Bernard Madoff's alleged "$50 billion ponzi scheme." Even commission chair Chris Cox lamented "multiple failures over at least a decade" in the matter. And yesterday President-elect Barack Obama declared that the commission had "dropped the ball."

But it's also becoming clear that the Madoff failures didn't arise out of nowhere. In recent years, particularly under Cox, a former California GOP congressman, the SEC has pursued a policy of de-emphasizing enforcement, part of the broader anti-regulatory philosophy of the Bush years -- helping to make Madoff, and perhaps others like him, possible.

"[Cox] in many ways worked to dismantle the SEC," Ed Nordlinger, a former longtime enforcement director in the commission's New York office, told TPMmuckraker. "He slowed everything down. I don't think he believed in heavy regulation."

That view has been echoed by several others in a position to know. Ross Albert told TPMmuckraker for a post published yesterday: "Under Cox, SEC had de-emphasized the enforcement program. Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

And a former enforcement division supervisor told Portfolio for a lengthy October story about the SEC under Cox: "It was like someone poured molasses on the enforcement division."

How, specifically? Let us count the ways -- many of them detailed in that Portfolio story -- which focused on what it described as Cox's scaling back of the commission's enforcement role and was titled "SEC No Evil" -- as well as a followup web piece by the same writer, Scott Paltrow.

First, the SEC under Cox did not take steps to make sure that it had enough inspectors to look into the fast-growing number of financial institutions requiring regulation.

The enforcement division has actually lost staff under Cox, even as its workload increased. "Since Cox took office in 2005, the staff count in the division has dropped 9 percent, to 1,124 people this year," reports Portfolio.

Cox's predecessor, William Donaldson, a friend of the Bush family, told the magazine, carefully: "With the kind of problems we have now, any attempt to reduce the effective role of the S.E.C. as a policeman has been a mistake."

We're hoping to have more extensive numbers on this later today, but former SEC chair Arthur Levitt recently told Bloomberg that in 2004, the agency had 477 people in its inspection office, overseeing about 8,000 investment advisers, while today, 430 people regulate 11,300 advisers.

And a union rep for SEC workers told the Washington Post for a story published today that employees were "outgunned" and "underfunded."

Cox also, according to Portfolio, didn't replace the head of the S.E.C.'s new risk-assessment office -- created under Donaldson to improve the commission's ability to anticipate financial upheavals like the one we're in now -- for nearly two years.

But it's not just a human resources problem. According to the magazine, Cox instituted new rules which gave the commissioners, rather than the enforcement staffers, the power to negotiate fines against public companies in certain cases. The result has been a drop in penalties since the rule came into effect.

Portfolio added:

A January analysis by the law firm Morgan Lewis found that S.E.C. penalties have dropped by a "staggering degree" and that "the numbers suggest a philosophical shift by the Cox commission in what constitutes an appropriate penalty."

And Cox distanced himself from the enforcement division, according to Portfolio, rarely consulting with its director. His predecessors had conferred daily with their enforcement directors.

The commission also appears to have passed over for promotion staff members who were too aggressive in their approach to enforcement. Veteran S.E.C. lawyer James Coffman told Portfolio that he was told he didn't get a promotion because he was "too tough." He left the SEC soon after.

In addition, Cox failed to fix a communications problem within the commission, which made enforcement harder. Portfolio reports:

Madoff was required to tell one S.E.C. office how much money he managed as an investment adviser, but was required to report his actual trading positions to another office.

Katz [a former secretary to the commission] said if the two had been compared, investigators may well have discovered a big discrepancy that would have triggered a focused investigation.

Cox will step down when the Bush administration leaves office. Obama's pick for the job, Mary Schapiro, has a reputation as a dedicated regulator, and close SEC watchers expect her to move the commission back toward its enforcement mission -- a shift that appears to have been necessary long before Bernard Madoff became a household name.

David Safavian

Safavian Jury Reaches Verdict

Zachary Roth | December 19, 2008, 12:37PM

The jury in the corruption trial of Abramoff crony David Safavian has reached a verdict. We'll learn later today what it is, reports the Associated Press.

Safavian, who served as the White House's chief procurement officer, is on trial for allegedly lying to investigators about his relationship with Abramoff.

Safavian was convicted in 2006, but that conviction was overturned on appeal.

More when the verdict is available...

The Daily Muck

Chris Black | December 19, 2008, 10:07AM

In an interview with the Associated Press, the watchdog for the government's $700 billion bailout program expressed frustration with the Bush administration's delay in providing a plan for allocating bailout funds. Elizabeth Warren, the chairwoman of the Congressional Oversight Panel, is also angry over the apparent secrecy surrounding the Treasury Department's decisions. Warren has previously expressed these disappointments in an interview with the New York Times and in her report to congress. (Associated Press)

The Government Accountability Office has found in a new report that the U.S. Navy is storing at least $7.5 billion worth of spare parts in warehouses across the country. Excess amounts reach into the millions, including 2 million unneccesary aircraft parts and 10 million unnecessary ship parts. The revelation could provide fuel for those who argue for cuts to the Defense Department's budget. (Boston Globe)

Sen. Jim Bunning (R-KY) has drawn scrutiny for his role as the single salaried employee of a charity he set up in 1996. The Jim Bunning Foundation has paid the senator $180,000 and yet only distributed $136,435 to Kentucky charities. Watchdog groups are concerned that the foundation skirts IRS and Senate rules governing outside income for senators. (Associated Press)

Read more »

Bernard Madoff

SEC's Madoff Probe: How Much Blame Does It Deserve?

Zachary Roth | December 18, 2008, 6:33PM

As readers who have been following this story know, the SEC conducted a number of reviews of Bernard Madoff's brokerage business over the last decade, and found no serious problems.

But if the SEC can be said to be on trial, one recent investigation may be emerging as Exhibit A for the prosecution.

That's the one, highlighted by the Wall Street Journal this morning, that begun in 2006 in response to a long and detailed complaint from Harry Markopolos, a rival broker, and wrapped up the following year with its only significant action being to require Madoff to register as an investment adviser.

But is it fair to blame that SEC team for falling down on the job? And was the wrap on the knuckles ultimately prescribed by the commission an example of Madoff getting special treatment?

To a lay person, the details of the case appear pretty damning. In an SEC enforcement document entitled "Case Closing Recommendation" and posted by the Journal, an SEC staffer wrote:

[I]n the course of a preliminary inquiry into [Markopolos' allegations that Madoff's hedge fund profits were the result of fraud], the staff learned that during a recent examination of BLM by NERO's broker-dealer examination staff, Bernard Madoff, the sole owner of BLM, did not fully disclose to the examination staff either the nature of the trading conducted in the hedge fund accounts or the number of such accounts at BLM.

Under "Conclusions Reached", the document reads:

The staff found no evidence of fraud. The staff did find, however, that BLM acted as an investment adviser to certain hedge funds, institutions, and high-net -worth individuals in violation of the registration requirements of the Advisers Act ... As a result of discussions with the staff, BLM registered with the Commission as an investment adviser.

Then, under "Reasons for Closing":

We recommended closing this investigation because ... BLM ... voluntarily remedied the uncovered violations, and because those violations were not so serious as to warrant an enforcement action.

The document is said to have been "prepared by Simona Suh, Staff Attorney, and reviewed and approved by Doria Bachenheimer, Assistant Regional Director and Meaghan Cheung, Branch Chief."

There are two separate questions here:

First, did the SEC stumble by not detecting the fraud that Madoff himself would confess to the following year? It certainly looks that way.

"Were there sufficient red flags for SEC to have caught this?" asked Ross Albert, a partner at Morris, Manning & Martin in Atlanta, and a former SEC senior special counsel. "Absolutely, without a doubt."

"Would a more aggressive team have caught it?," he continued. "Yes."

James Cox, a securities expert at Duke Law School, agreed, calling it "pretty amazing" that the commission failed to detect what appears to have been such large-scale fraud.

But given what SEC did find, was the mild action they took -- merely requiring that Madoff register as an investment advisor -- appropriate?

Albert said that it was. He pointed out that SEC ultimately found only that Madoff did not disclose certain information to examiners, not that he necessarily misled them, as the original inquiry had alleged. And given that the major problem identified was his failure to register as an investment adviser, requiring him to do so was an obvious and appropriate remedy.

Albert identified a less tangible, more philosophical problem as one major factor in the failure to catch Madoff. "Under [commission chair Chris] Cox, SEC had de-emphasized the enforcement program," he said. "Cox worshipped at the same altar of de-regulation that the rest of the Bush administration worshipped at."

That can work OK in good times, he said. But in bad, it can lead to disaster.

Wall Street

Obama: Wall Street Regulators "Dropped the Ball" On Madoff

Zachary Roth | December 18, 2008, 11:54AM

It looks like President-elect Barack Obama is on board with the emerging consensus about the Securities and Exchange Commission's failure to properly probe Bernard Madoff despite several warnings.

At a press conference this morning to announce key members of his financial regulatory team, including SEC chair, Obama declared:

In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets. Charities that invested in Madoff could end up losing savings on which millions depend - a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball. And if the financial crisis has taught us anything, it's that this failure of oversight and accountability doesn't just harm the individuals involved, it has the potential to devastate our entire economy. That's a failure we cannot afford.

As SEC chair, Obama named Mary Schapiro, a former SEC commissioner and Commodity Futures Trading Commission chair who now runs the Financial Industry Regulatory Authority, the largest regulator for all securities firms that do business with the United States.

The Daily Muck

Chris Black | December 18, 2008, 10:14AM

A new report from the Inspector General of the State Department recommends that the department not renew Blackwater Worldwide's license to operate in Iraq. The absence of Blackwater contractors would be the most significant of numerous security challenges facing American diplomats in the country. (Associated Press)

A new report from the ombudsman for U.S. Citizenship and Immigration Services charges that some federal judges have delayed swearing-in ceremonies for newly naturalized citizens. The delays, which stem from judges insisting upon administering oaths themselves -- thus earning a fee from the government -- may have kept many from voting in the November election. (Washington Post)

Residents of Las Vegas, Nevada and the surrounding area are complaining to the Congressional Oversight Panel of the federal bailout program that the results of the spending have not yet "trickled down" to average Americans. The area has seen unemployment rise to 7 percent and has the nation's highest foreclosure rate. (Los Angeles Times)

Read more »

Bernard Madoff

SEC Vet: Commission Missed Some "Classic Red Flags" On Madoff

Zachary Roth | December 18, 2008, 8:57AM

A securities enforcement veteran has added his name to the growing consensus that the SEC's failure to detect Bernard Madoff's alleged "$50 billion ponzi scheme" likely represented a serious failure on the part of the commission.

Robert Fusfeld, who spent 31 years as an SEC enforcement lawyer, and for 15 managed the trial unit in the commission's Denver office before retiring in 2006, told TPMmuckraker in an interview last night that Madoff's profile contained several "classic red flags" that should have attracted the SEC's attention.

Among those, he said, were the facts that Madoff's outside auditor was a three-person firm operating out of a small suburban office (one employee was a secretary, and another a 78-year old living in Florida); that Madoff is said to have used a secretive "black box" algorithm to determine when to buy and sell stocks; and that he had social ties -- often through the Jewish community -- to many of his investors.

Fusfeld said that these characteristics should certainly have alerted enforcement lawyers to the possibility of fraud -- though he stressed that he had no direct knowledge of the case, and that the facts still remained opaque.

On Tuesday night, SEC chair Chris Cox acknowledged in a statement that there had been "apparent multiple failures over at least a decade" to thoroughly investigate claims against Madoff.

Since 1999, the SEC has conducted several reviews of Madoff's brokerage business -- though none, it appears, of his investment advisory business, where the fraud is alleged to have taken place. A 2005 inquiry found several rule violations, but a subsequent review last year -- conducted after he had registered with the commission in 2006 -- gave Madoff a clean bill of health.

Fusfeld added that during the 90's he had used Madoff as a witness in a securities case to which Madoff was tangentially connected. "The man had charisma," said Fusfeld."He was one of those people that, when he walked into a room, everyone stopped what they were doing and watched him."

Had the SEC watched him a little closer, however, numerous investors might have been saved some crippling losses.

Bernard Madoff

Unlike Dad, Madoff's Sons Used Outsiders To Manage Foundation Funds

Zachary Roth | December 17, 2008, 2:15PM

We've seen a lot about the philanthropic organizations, many of them focused on Jewish issues, that have taken huge hits after entrusting their money to Bernard Madoff. And Madoff's own philanthropic foundation was managed by its proprietor's investment firm, of course.

But Madoff's sons had their own foundations -- and it looks like they did things differently. Rather than entrusting the money to their father, Mark and Andrew Madoff appear to have relied on Neuberger Berman and Lehman Brothers to manage the funds, according to documents dug up by the blog Cityfile New York. (Until September, Lehman was Neuberger's parent company.)

Even with Lehman's collapse -- which ultimately led to Neuberger being taken over by its top executives, pending approval by a bankruptcy court, the brothers appear to have made a very wise decision*.

That's not to suggest that Mark and Andrew, who both worked for their father's company, supervising the firm's stock-trading desks, knew anything about their father's operation that led them to turn to an outside firm

The New York Times reports today that investigators have so far found no evidence that would contradict Madoff's initial statement, according to a criminal complaint filed last week, that it was "all his fault."

But at the very least, it suggests they perhaps didn't view their father as the omniscient wizard of the market that he often seemed to present himself as.

* This sentence has been corrected from an earlier version.

Bernard Madoff

Madoff: "It Is Virtually Impossible To Violate Rules"

Zachary Roth | December 17, 2008, 1:14PM

Bernard Madoff may be accused of running a "$50 billion ponzi scheme", but he certainly professed to have a high regard for the system of regulation that he allegedly beat for so long.

At a roundtable discussion on "the future of Wall Street" held last year, he noted at one point:

In today's regulatory environment it is virtually impossible to violate rules ... It's impossible for a violation to go undetected, certainly not for a considerable period of time.

He also said, later in the same discussion, that by using computers instead of humans, he had helped his firm to avoid violating the law. Although, he added, laughing, "I guess you could also program your computer to violate regulation, we haven't got there yet."

Watch the video:

Bernard Madoff

Madoff: "Most Of Us In This Industry Really Have Their Clients' Interests ... Coming First"

Zachary Roth | December 17, 2008, 12:44PM

As has been widely reported, one of the reasons why Bernard Madoff may have avoided regulatory scrutiny for so long is that he frequently served as an advisor to the SEC -- the very agency that should have been watchdogging him.

And here's an example of the kind of advice he was giving. During a 2004 meeting to discuss a proposed regulation of market trades, designed to protect investors, Madoff argued for making it easier for investors to opt out of the rule:

Again, you start -- have to start with, and I know this -- the modern times today does not support, you know, this amount of good faith in your brokerage firm. But you really have to start with the assumption that most of us in this industry really have their clients' interests, you know, coming first. Not necessarily the firm's self-interest.

It's worth being clear that Madoff is talking about brokerage firms, not investment advisers -- which is the arm of his business now being accused of massive fraud. But his apparent faith in the integrity of financial managers is striking, nonetheless.

Norm Coleman

Coleman Wants To Use Campaign Money For Legal Fees

Zachary Roth | December 17, 2008, 11:35AM

How can Norm Coleman afford the services of Doug Kelley, the high-profile attorney he just hired on connection with the allegations in the Nasser Kazeminy lawsuit? After all, as Kazeminy himself is alleged to have said: "US senators don't make shit."

The answer: he plans to use campaign funds.

"We intend to have any legal fees related to what we believe to be a politically inspired legal action to be covered by the senator's campaign," said Coleman spokesman Luke Friedrich, Politico reports.

The FEC allows politicians to use campaign funds only if their legal bills arise from their official duties or their campaigns. Coleman, a Minnesota GOP senator, has claimed that suit only came to light because of his reelection fight, in which he is currently locked in a recount with Democrat Al Franken -- though many of the allegations pre-date the campaign.

The lawsuit claims that Kazeminy, a friend and supporter of Coleman, used a company he owns, Deep Marine Technologies, to pass money to the senator by making payments to the insurance broker, Hays Insurance, that employs Laurie Coleman, Norm's wife.

The Daily Muck

Chris Black | December 17, 2008, 10:13AM

The former CEO of one of the nation's largest reinsurance companies recieved a sentence of two years in prison and $200,000 in fines. Ronald E. Ferguson, the former top executive at General Re, was charged for his role in a scheme that cost shareholders of American International Group at least $500 million. Convictions include mail fraud, securities fraud, and lying to the SEC. (New York Times)

Glenn Marshall, the former chairman of the Mashpee Wampanoag Tribe, pleaded guilty in his trial for involvement with former lobbyist Jack Abramoff. The charges against Marshall include embezzling tribal money, receiving fraudulent disability benefits from Social Security, and making illegal campaign contributions. (New York Times)

Federal authorities believe that former state Sen. Jerry Ward convinced a witness in the Ted Stevens trial to lie about a phony immunity deal in order to protect Ward. According to the Daily News-Miner newspaper of Fairbanks, Alaska, Ward is the only potential fit for the description found in federal documents filed Monday in Washington D.C. (Fairbanks Daily News-Miner)

Read more »

Bernard Madoff

SEC Chair Blasts "Multiple Failures Over At Least A Decade" On Madoff

Zachary Roth | December 17, 2008, 9:15AM

We've been focusing lately on the growing signs of negligence by the SEC in the Bernie Madoff case. And now the commission itself has done the same.

In an extraordinary admission of failure, SEC chairman Christopher Cox last night ordered a full review by of why his agency failed to act on complaints about Bernard Madoff, citing "deeply troubling" findings in its initial investigation since news broke last week of Madoff's alleged "$50 billion ponzi scheme".

Wrote Cox in a statement:

The Commission has learned that credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action.

Cox lamented "apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them."

The past reviews of Madoff's brokerage business -- not the investment business where the alleged fraud took place -- appear to have been little more than cursory. Cox wrote that the commission didn't use its subpoena power, but instead "relied upon information voluntarily produced by Mr. Madoff and his firm."

And there's a suggestion that Madoff's and his family's personal relationships with SEC officials may have led the commission to go easy.

The investigation should also include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.

Cox added that he had ordered "the mandatory recusal from the ongoing investigation of matters related to SEC v. Madoff of any SEC staff who have had more than insubstantial personal contacts with Mr. Madoff or his family, under guidance to be issued by the Office of the Ethics Counsel."

Madoff's niece, who works as a compliance lawyer at his firm, in 2007 married a former SEC official, who had previously participated in the reviews of Madoff's brokerage business.

Cox wrote that the investigation will be conducted by the SEC's inspector general.

Norm Coleman

Lawyer For Coleman's Wife Is "Aggressive Defender of Celebrity Defendants"

Zachary Roth | December 16, 2008, 5:09PM

We told you earlier today that Norm and Laurie Coleman have hired separate lawyers in connection with the FBI investigation into the Nasser Kazeminy allegations.

And here's a bit more evidence that the pair are taking the allegations very seriously indeed:

According to a recent St. Paul Pioneer-Press report (via Nexis), Laurie Coleman's attorney, Earl Gray, is "known as an aggressive defender of celebrity defendants." In other words, Gray doesn't appear to be the kind of lawyer you hire if you don't think you're going to be under much scrutiny.

Here's a quick rundown of some of the high-profile cases Gray has been retained for (all sourced to news reports found via Nexis):

- the "Love Boat" case, in which then-Minnesota Vikings quarterback Daunte Culpepper, was charged with sexual misconduct stemming from his conduct during a 2005 team boat ride.

- a case earlier this year involving star University of Minnesota football player Dominic Jones, who was accused of rape, and eventually convicted of unwanted sexual conduct, in an incident captured on a cellphone video.

- a city council member who pleaded guilty last month to hiring a prostitute.

- a teacher accused this year of having sex with a 14-year-old student.

- a widely publicized 1984 child-sex ring case.

And despite his name, Earl Gray may not be every prosecutor's cup of tea (sorry!). The Star-Tribune described him in 2006 as "a street-fighter in the courtroom whose aggressive, even abrasive legal tactics can leave prosecutors bruised and bitter."

The paper added:

'He aggressively attacks police and prosecutors for perceived mistakes in a criminal investigation,' said Dakota County Attorney James Backstrom ... 'He is very good at creating smoke screens out of nothing.' Fred Karasov, an assistant Hennepin County attorney who has successfully tried cases against Gray, said he 'can be intimidating, aggressive, some would call him abrasive.'

Laurie Coleman is central to the allegations involving her husband. A lawsuit claims that Kazeminy used a company he owns, Deep Marine Technologies, to pass money to Norm Coleman, by making payments to the insurance broker, Hays Insurance, that employs Laurie Coleman.

And we hear that Norm Coleman's lawyer, Doug Kelley, is no wilting flower either. More to come on him, most likely...

Interior Department

Interior Official's Trail Of Ruin

Chris Black and Natalie Sherman | December 16, 2008, 4:22PM

Remember Julie MacDonald, President Bush's former assistant secretary for Fish, Wildlife, and Parks who resigned in 2007 amid stories of sharing files with energy industry insiders and drawing conservation boundaries around family property?

Well, she's back in the news.

A new report (pdf) released on Monday by the office of Sen. Ron Wyden (D-OR) lambastes MacDonald for interfering in the execution of the Endangered Species Act (ESA). According to the report, issued by the Interior Department's Inspector General at the request of Sen. Wyden, MacDonald -- who was appointed by anti-environmental former Interior Secretary Gale Norton -- interfered in 13 of 20 investigated decisions regarding endangered species protection and "compromised the scientific credibility of the Fish and Wildlife Service."

Some of the juicier nuggets from the 141-page report's findings follow after the jump.

Read more »

Jesse Jackson Jr.

Jackson Has Been Talking To Feds About Blagojevich Since The Summer

Zachary Roth | December 16, 2008, 4:00PM

Looks like Jesse Jackson has been cooperating with Pat Fitzgerald's probe of Rod Blagojevich for longer than we knew.

The Associated Press reports:

A spokesman for Rep. Jesse Jackson Jr. tells The Associated Press the congressman has been talking to federal investigators about his dealings with Gov. Rod Blagojevich (bluh-GOY'-uh-vich) since summertime.

Spokesman Rick Bryant wouldn't give details of those discussions Tuesday morning.

But a report from WLS-TV in Chicago cites unidentified sources as saying Jackson has told investigators Blagojevich wouldn't appoint Jackson's wife as state lottery director because Jackson wouldn't donate $25,000 to the governor's campaign fund.

Jackson has admitted to being "Senate Candidate 5" identified in the charging document against the Illinois governor. Blagojevich says in a recorded conversation that an "emissary" from Candidate 5 proposed a "pay to play" deal for Barack Obama's vacated Senate seat.

Late update: In fact, Jackson's cooperation may have gone on for much longer than that. CNN reports:

Rep. Jesse Jackson, Jr. has served as an informant to the U.S. attorney's office in Illinois, two sources close to Jackson tell CNN.

Jackson has served as an informant for more than a decade and has relayed information relating to embattled Gov. Rod Blagojevich since 2006, the sources said.

Bernard Madoff

Why Didn't SEC Look Closer At Madoff?

Zachary Roth | December 16, 2008, 2:50PM

The Bernie Madoff fiasco is looking more and more like a serious regulatory failure by the Securities and Exchange Commission.

The Washington Post confirms that, despite several complaints dating back to 1999, the SEC never examined Madoff's investment advisory business. And it pieces together a preliminary explanation for why that might have been the case.

First, Madoff appears to have had a cozy relationship with regulators. After helping to create the NASDAQ, which was the first electronic stock exchange, he went on to advise the SEC on electronic trading.

In this video from a roundtable discussion held last year about the future of the stock market, he brags: "I'm very close to regulators. In fact my niece just married one." (It's at the 1-hour, 51-minute mark.)

In addition, Madoff's investment business was organized as a private investment pool, which is subject to limited oversight by regulators*. And, says the Post, "Madoff constructed his investment business to avoid most of it."

But part of the problem may be the way the SEC is set up -- including a lack of resources. Reports the Post:

The SEC does not have the resources to examine investment advisers on a regular schedule. Instead, the agency prioritizes examinations of companies based on their risk profile, which is basically a process of judging books by their covers. People familiar with the process said the SEC tends to focus on high-risk investment strategies, such as trading in derivatives.

Lori A. Richards, director of the SEC's Office of Compliance Inspections and Examinations, said that only 10 percent of the 11,300 investment advisers registered with the SEC are examined on a regular basis -- those with high-risk characteristics. They are examined every three years. Others might be examined randomly or where there is cause, Richards said.

From 1998 to 2002, the SEC aimed to examine every adviser at least once every five years and to examine newly registered advisers during their first year, but a 50 percent increase in the number of advisers since 2002 ended that practice, Richards said.

Still, there were warning flags that the SEC should have caught, some experts told the Post:

The brokerage arm of Madoff's firm had generated consistent complaints going back to 1999 for its unusually consistent returns, and had been reviewed by the SEC several times (but had largely been given a clean bill of health).

In addition, Friehling and Horowitz, the firm acting as Madoff's outside auditor had only three employees, one of whom was a secretary and another of whom was a 78-year old living in Florida. Only a few auditing firms have the resources to audit a company managing $17 billion on assets -- which is what Madoff had reported to the SEC -- and Friehling and Horowitz was certainly not among them.

There are still more questions than answers though -- not least about exactly what Madoff's alleged scam consisted of. We'll keep you posted as things become clearer.

* This sentence originally, and incorrectly, stated that Madoff's investment business was organized as a hedge fund. In fact, as the New York Times reported Friday:

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist. But because he had his own securities firm, Mr. Madoff kept custody over his clients' accounts and processed all their stock trades himself.

So that distinction helps further explain why Madoff escaped scrutiny for so long.

Bernard Madoff

Madoff's Firm: All In The Family

Zachary Roth | December 16, 2008, 1:09PM

We told you earlier that the niece of Bernard Madoff -- who's accused of running a "$50 billion ponzi scheme" through his investment firm -- is married to a former top SEC compliance official who had been involved in two reviews of Madoff's firm. And that Madoff bragged about the family connection last year.

But it's worth piecing together the extent of what we know about the cozy web of family ties that may have allowed Madoff to escape scrutiny for so long.

CNBC reports that the compliance department of Bernard Madoff's firm is run by Bernard Madoff's brother Peter, and by Bernard Madoff's niece, Shana Madoff Swanson, who's married to the former SEC official, Eric Swanson. That team appears to also include Bernard Madoff's son, Mark Madoff, who the Wall Street Journal last week identified as the firm's senior managing director and chief compliance officer.

The Journal added that Bernard Madoff's other son, Andrew Madoff is the firm's director of trading.

And it looks like Mark Madoff and the former SEC official, Eric Swanson, were at least acquainted with each other before Swanson married Mark Madoff's cousin Shana, and, just as important, before Swanson had left the SEC. Here's a picture of Mark Madoff and Eric Swanson appearing together on a 2006 panel organized by the Securities Traders Association. Swanson is identified as being with the SEC at the time.

It's also worth noting that Eric Swanson and Shana Madoff met through their work in that industry trade association, according to Eric Swanson's current employer. (That spokesman also said that when Swanson participated in an SEC review of Madoff's firm in 2004, he and Shana Madoff were not in a relationship. They married in 2007.)

And to cap things off, the Journal today reports that investigators are looking into the role that Bernard Madoff's wife, Ruth, may have played in the alleged scam.

It looks like the all-in-the-family nature of Madoff's business could have helped him pull off the alleged fraud -- at least before his sons fully wised up and decided to tell their lawyer.

Madoff, a former Nasdaq chair, is scheduled for a bond hearing at 2pm today.

Bernard Madoff

Madoff Bragged About Family Tie To SEC

Zachary Roth | December 16, 2008, 11:43AM

The failure of the SEC to effectively investigate Bernard Madoff's brokerage/investment firm is shaping up as a major piece of the Madoff story.

And today Politico reports that Madoff's niece, Shana Madoff Swanson, who works as a compliance attorney at his firm, is married to a former top SEC official, Eric Swanson.

Madoff himself wasn't above bragging about his family connections to the regulatory authority that should have been watch-dogging him. ABCNews.com reports:

At a business roundtable meeting last year, Madoff boasted of his "very close" relationship with a SEC regulator, chuckling as he said, "in fact, my niece even married one."

Politico make clear that Swanson was in a key post relating to SEC's enforcement of securities law :

Swanson was the assistant director in the SEC's Office of Compliance Inspections and Examinations' market oversight unit in Washington. According to his biography, Swanson "supervised and conducted inspections and examinations that involved a wide range of issues including best execution, order handling, insider trading [and] market manipulation."

But there are some mitigating factors here. The SEC's director of compliance and examinations told Politico that Swanson participated in two investigations of Madoff's broker-dealer operation -- in 1999 and 2004 -- but not the 2005 probe*.

Swanson left the SEC in 2006, and the couple were married the following year. So were they dating when Swanson helped out on the 2004 investigation?

A spokesman for Swanson's current employer, BATS, which describes itself as the third largest stock exchange in New York, says no:

Eric Swanson worked at the SEC for 10 years and did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship with Shana, whom he met through her trade association work in the industry.

It's impossible to know right now whether Madoff's family connection allowed him to exert any improper influence on the SEC. But something tells us we're going to hear more on this...

* A spokesman for Eric Swanson's firm tells TPMmuckraker in an email that Politico was wrong on one detail: "Eric Swanson joined the group in question at the SEC in 2000 and thus was not part of the 1999 investigation of Madoff."

Nasser Kazeminy

Separate Lawyers For Norm And Laurie Coleman

Zachary Roth | December 16, 2008, 11:05AM

So Norm Coleman has hired a lawyer in connection with the claims made in the lawsuit against his longtime supporter Nasser Kazeminy. And so has Coleman's wife, Laurie.

But notice that the Colemans hired separate lawyers. That suggests that, perhaps prompted by the news that the FBI is now involved, the Minnesota senator and his wife are taking these allegations very seriously indeed.

Laurie Coleman is central to the allegations involving her husband. The lawsuit claims that Kazeminy used a company he owns, Deep Marine Technologies, to pass money to Norm Coleman, by making payments to the insurance broker, Hays Insurance, that employs Laurie Coleman.

The hiring of separate lawyers could also mean that the Colemans' interests in the case diverge. But we'll have to wait to see how this plays out before drawing any firmer conclusions...

The Daily Muck

Chris Black | December 16, 2008, 9:58AM

A lawsuit brought against Donald Rumsfeld by former detainees at Guantanamo Bay will be given a second look by a federal appeals court at the request of the Supreme Court. The former detainees, who are British subjects, charge that they were tortured and subjected to religious persecution at the camp. (New York Times)

Another midnight rules change by the Bush administration: a proposed new regulation for the Department of Energy would eliminate a rule of thumb encouraging the department to release information, even if not legally required to do so, if the information would benefit the public interest. (Federation of American Scientists)

A new report issued by the Inspector General of the Department of the Interior charges that a senior official mishandled nearly every decision she was responsible for with respect to the Endangered Species Act. Julie McDonald, a deputy assistant secretary in the Fish and Wildlife Service from 2002 until her 2007 resignation, was found to have exerted "improper political interference" throughout her work for the department, ruling in favor of industry and against environmental protection. (AP)

Read more »

Norm Coleman

Coleman Lawyers Up

Zachary Roth | December 16, 2008, 9:33AM

More signs that Norm Coleman is taking the allegations in the Nasser Kazeminy lawsuit very, very seriously.

The Minneapolis Star-Tribune reports that all four of the principals in the alleged scheme to pass money to Coleman -- Kazeminy, Coleman, his wife Laurie Coleman, and Jim Hays of Hays Insurance -- have hired high-powered Minnesota lawyers.

The Strib runs down the details:

Norm Coleman has hired Doug Kelley, Laurie Coleman is represented by Earl Gray, Hays is aligned with Doug Peterson and Kazeminy has secured the services of Joe Friedberg.

Kelley, Gray and Peterson are former federal prosecutors now engaged in criminal defense and white-collar litigation. For years they have been mainstays in the federal judicial system in Minnesota, working cases ranging from fraud to drugs to homicide.

In the past, Friedberg has been the attorney representing Winthrop & Weinstine law firm in Minneapolis, which once employed Coleman and currently claims Kazeminy as a client.

The paper adds:

[T]he attorneys have retained a Twin Cities-based private investigations company composed of former FBI agents to gather information about the case, according to two people with knowledge of the developments.

Last week it was reported that the FBI had launched an investigation into the allegations in the lawsuit, which revolve around charges that Kazeminy, a longtime friend and supporter of Coleman, tried to pass money to the senator by having a Kazeminy-owned company, Deep Marine Technologies, make payments to Hays Insurance, which employed Laurie Coleman. The lawsuit was filed by Paul McKim, the former CEO of Deep Marine.

Blackwater

Will Hillary Follow Through On Campaign Pledge To Ban 'Private Mercenaries'?

Justin Elliott | December 15, 2008, 6:36PM

Back in February, Senator Hillary Clinton cosponsored legislation calling for the Secretary of State to ban the use of private contractors like Blackwater from guarding State Department employees -- a position that takes on new significance now that she is Secretary Of State designate.

It was about three weeks after Super Tuesday in the heat of the Democratic primary -- and five months after the killing of 17 Iraqi civilians at Nisour Square by now-indicted Blackwater employees working for the State Department -- when Clinton took an aggressive stand against the use of private forces. A strongly-worded statement issued by her office lashed out at "private mercenary firms":

From this war's very beginning, this administration has permitted thousands of heavily-armed military contractors to march through Iraq without any law or court to rein them in or hold them accountable. These private security contractors have been reckless and have compromised our mission in Iraq. The time to show these contractors the door is long past due.

And in late February, Clinton became the sole Senate cosponsor of a bill, S.2398, the Stop Outsourcing Security Act that had been introduced by Sen. Bernie Sanders (I-VT).

In a major speech on Iraq a couple of weeks later, Hillary reiterated her support for removing private contractors from "combat-oriented and security functions in Iraq."

Read more »

Karl Rove

Rove Protege Griffin Mulling Senate Bid

Zachary Roth | December 15, 2008, 4:48PM

Karl Rove may be relegated to Fox News appearances and hoping to avoid prosecution once President Bush leaves office -- but the political career of one of his proteges, Tim Griffin, may just be getting started.

The Associated Press reports that Griffin, a former White House and RNC staffer, is mulling a run for the US Senate from Arkansas against Democrat Blanche Lincoln in 2010.

"I am certainly thinking about it," Griffin told the AP. "I'm going to spend some time going around the state and talking to folks and getting an idea of the interest level. ... I'm going to try and hit all 75 counties as soon as possible and I know that's a tall order trying to hit all of those in the next few months."

A DOJ report released this fall found that the department improperly fired Bud Cummins as US Attorney for the eastern district of Arkansas in order to make room for Griffin, thanks in part to pressure from the White House political office. Wrote Kyle Sampson, the DOJ point man for the round of politically motivated firings of which Cummins' was a part: "Getting [Griffin] appointed was important to Harriet, Karl, etc."

Griffin served six months as interim US Attorney but was never confirmed by the Senate.

Griffin has a long trck record as a partisan political knife-fighter. He has been accused of participating in a scheme to cage black voters in Florida in 2004, and was paid by the RNC to dig up dirt on both John Kerry in 2004 and Barack Obama this year.

After leaving the interim U.S. Attorney job last year, a tearful Griffin said public service was "not worth it" and that he had no plans to return to politics.

He appears to have reconsidered. And as someone who, the evidence suggests, consistently puts partisan advantage over the public interest, Griffin should fit right in with his Senate GOP colleagues if he wins the seat.

Bernard Madoff

SEC Didn't Probe Madoff's Investment Biz -- Despite Complaints

Zachary Roth | December 15, 2008, 4:15PM

Four days after Bernard Madoff was arrested for allegedly running a "$50 billion ponzi scheme" disguised as an investment advisory business, attention is beginning to focus on what looks like a glaring failure of oversight by government regulators.

Let's step back for a second. Part of what may have helped Madoff escape scrutiny is that his company consisted of two separate arms -- a securities brokerage, which acted as a middleman between buyers and sellers of shares, and a straight investment business. According to the SEC complaint filed last week, Madoff ran the investment arm as a secretive business separate from the brokerage, and it was this arm that was used to perpetrate the alleged fraud.

Bloomberg reported yesterday that since Madoff registered the investment arm with the Securities and Exchange Commission in 2006, that agency hadn't got around to looking at the business's books. The SEC usually tries to go through the books of newly registered firms in their first year.

"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," one expert told the Associated Press.

But the problem doesn't appear to have started in 2006.

As early as 1999, an executive in the securities industry had urged the SEC to probe Madoff, on the basis of the remarkably steady returns that his investment business seemed to provide. The executive, Harry Markopolos, argued that Madoff must be generating those returns by "front-running" -- that is, using the brokerage arm of his company to illegally provide information to the investment arm.

The SEC said in a statement that it had conducted two investigations into the brokerage arm -- not the investment arm -- of Madoff's company, in 2005 and 2007. The first, begun in response to allegations of front-running, found three violations of rules requiring brokers to obtain the best possible price for customer orders. That investigation appears to have led to Madoff agreeing to register with the SEC the following year, giving the agency access to far more information than it previously had. But the 2007 probe, conducted after Madoff registered, found no evidence of anything improper.

It's unclear why the probes focused on the brokerage arm when it was the investment arm that had generated complaints in the past -- and which apparently would have been the arm that improperly profited from any front-running activity.

So there are still far more questions than answers, including in regard to the performance of government regulators. But so far, the SEC doesn't appear to have covered itself in glory on this one.

Bailout

Bailout Bill Loophole Could Render Exec Pay Limits Meaningless

Zachary Roth | December 15, 2008, 2:36PM

When Congress was writing the bailout bill back in September, one of the major sticking points was its insistence on including limits on executive compensation for the banks that were going to be taking taxpayer money. The issue nearly derailed the bill, as Treasury argued that such limits would dissuade banks from participating. But Congress eventually won out.

Or at least it appeared to have. The Washington Post reports today that Treasury succeeded in getting a rather important loophole added in to the bill at the eleventh hour. It said that the pay limits would apply only to banks that participated in the bailout under the original plan in which Treasury would purchase the banks' troubled assets. Since the department quickly switched to a different approach, in which it simply injects equity into banks, the pay limits no longer apply.

"The flimsy executive-compensation restrictions in the original bill are now all but gone," said Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, told the Post.

Questioned by the Post, Treasury insisted it has "all the remedies available to us for a breach of contract," should banks refuse to abide by the limits.

But legal experts appear to disagree.

David M. Lynn, former chief counsel of the Securities and Exchange Commission's division of corporation finance, said courts have sometimes placed limits on the government's ability to impose penalties if there was no fair warning.

"Treasury might find its hands tied down the road," said Lynn, who is also co-author of "The Executive Compensation Disclosure Treatise and Reporting Guide."

It seems fair to conclude that there is strong internal resistance at Treasury to instituting the pay limits in a serious way. In addition to fighting Congress's efforts to impose them in the first place -- then adding the loophole which the Post highlights, there also some at Treasury who support a voluntary system of compliance, according to a finding of the recently released GAO report on the department's bailout spending, which we highlighted at the time.

And more broadly, Treasury appears uninterested in requiring banks to track what they do with the taxpayer money they're getting. And the House last week passed an amendment to the auto bailout bill that would require banks to say more about what they're doing with the bailout money -- a second bite at the apple after the rush to pass the bailout legislation in September.

Arlen Specter

To Placate GOPers, Leahy Delays Holder Hearings

Zachary Roth | December 15, 2008, 2:10PM

It looks like Republicans on the Senate Judiciary committee have won at least a partial victory in that battle with Judiciary chair Pat Leahy over the timing of confirmation hearings for Eric Holder, Barack Obama's nominee for Attorney General.

In a press release sent moments ago, Leahy wrote the he was delaying the hearings, and made clear he wasn't happy about it:

The Committee has not yet received the names of other designees for high-ranking Department of Justice officials that we had anticipated and more time is now available to the Judiciary Committee. Therefore, to accommodate the Republicans on the Judiciary Committee, at their request we are delaying the hearing, again, until January 15.
...

It is disappointing to me that they are insisting that we delay at a time when the nation needs its top law enforcement officer and national security team in place and working.

The delay is only a week, since Leahy had been planning to begin the hearings on January 8. He had argued that, after the politicization of the Bush years, it's particularly important for fresh leadership to be installed quickly.

The committee's GOP minority, led by Arlen Specter, has been arguing that Leahy's schedule doesn't allow enough time to review documents pertaining to Holder's role in the controversial pardon of Marc Rich in the waning days of the Clinton administration.

The dispute had gotten unusually pointed for an intra-committee disagreement. Leahy, in a letter to Specter, implied that the Republican's trip to Europe and the middle east this month was a congressionally sponsored junket. Leahy also dredged up a year-old quote from Republican Jon Kyl, arguing for a speedy confirmation of Michael Mukasey as Attorney General, which appears to contrast with today's GOP position on Holder. In announcing the delay today, Leahy again brought up Kyl's quote on Mukasey.

The full release follows after the jump...

Read more »

Duke Cunningham

Wade Gets 30 Months For Bribing Cunningham

Zachary Roth | December 15, 2008, 12:58PM

Mitchell Wade, the contractor who in 2006 pleaded guilty to bribing Duke Cunningham to the tune of over $1 million, was sentenced moments ago to 30 months in federal prison, and ordered to pay a $25,000 fine.

The relative leniency of the sentence suggests that Wade may have provided prosecutors with valuable information as they seek to build cases against others involved in the scandal.

A memo filed by Wade's lawyers two weeks ago claimed that he had helped prosecutors look into five other members of Congress.

Cunningham is currently serving an eight-year sentence in connection with the scandal.

Chuck Schumer

Schumer Helped Block Regulation Of Ratings Agencies

Zachary Roth | December 15, 2008, 12:03PM

We told you last month about the role of the credit ratings agencies in helping to cause the financial crisis. A major part of the problem, in a nutshell, is that the major ratings agencies -- Moody's, Standard & Poor's, and Fitch -- are paid by the institutions (often investment banks) who are issuing the bonds. That gives the agencies a clear incentive to produce favorable ratings, or risk seeing the banks hire a different ratings agency that's willing to offer a better rating.

But over the weekend, in a profile of Sen. Chuck Schumer, the New York Times revealed that the veteran New York Democratic lawmaker -- who, with seats on both the finance and banking committees, has built a reputation as a key ally of the financial sector, a major industry in his home state -- played a major role in stymieing efforts to fix that problem.

Here's what happened:

In 2006, Christopher Cox, the Bush-appointed chair of the Securities and Exchange Commission -- and hardly a left-wing proponent of heavy-handed government regulation -- became convinced that the conflict of interest problem needed to be addressed.

A plan to give the SEC more regulatory authority "drew broad, bipartisan support," says the Times. But it was opposed, of course, by the ratings agencies themselves ... who turned to Schumer.

"They knew Schumer would support them," one former Moody's executive told the Times. "He was their go-to guy."

The paper adds: "While the Manhattan-based agencies were not significant campaign donors to Mr. Schumer or the Senate campaign committee, their lobbyists and many of their clients were."

As an alternative to Cox's plan, Schumer advocated a largely voluntary approach in which regulators would simply encourage the agencies to disclose their ratings methods. "They're making good-faith efforts," Schumer told Cox at a 2006 Senate hearing.

Ultimately, says the Times, Schumer was able to get the measure amended "so that it explicitly prohibited the S.E.C. from regulating the procedures and methods the agencies use to determine ratings."

In other words, he appears to have blocked the crucial part of the legislation. Sean Egan, of Egan-Jones Ratings -- one of the few agencies that largely avoided buying into the mortgage bubble, perhaps in part because it's structured to avoid conflicts of interest -- told the Times: "The bill was eviscerated. You have stripped away basic safeguards for the investors."

And sure enough, under the weak regulatory system that Schumer had helped to ensure, the agencies,as we've seen, offered high ratings to bonds based on risky sub-prime loans, encouraging investors to see them as secure, and ultimately helping to inflate the mortgage bubble.

Schumer claims to have learned from his mistakes. He supported a belated but necessary SEC move earlier this month to meaningfully address the conflict of interest problem, and related issues, saying: "The work at these ratings firms was severely compromised, and the companies were some of the biggest contributors to the current financial crisis."

But had Schumer adopted that position back in 2006, when the SEC did, the ratings agencies might not have wound up as a significant cause of our current financial turmoil.

Iraq

Pentagon Report Confirms Failure Of Iraq Reconstruction Effort

Zachary Roth | December 15, 2008, 11:09AM

The New York Times and Pro Publica got an advanced look at a report on the American reconstruction of Iraq -- and it's not pretty.

The report concludes, in the words of the Times and Pro Publica, that even now, "the United States government has in place neither the policies and technical capacity nor the organizational structure that would be needed to undertake such a program on anything approaching this scale."

And it quotes Colin Powell saying that, in the months after the invasion, DOD "kept inventing numbers of Iraqi security forces -- the number would jump 20,000 a week! 'We now have 80,000, we now have 100,000, we now have 120,000.'"

But here's our favorite detail:

When the Office of Management and Budget balked at the American occupation authority's abrupt request for about $20 billion in new reconstruction money in August 2003, a veteran Republican lobbyist working for the authority made a bluntly partisan appeal to Joshua B. Bolten, then the O.M.B. director and now the White House chief of staff. "To delay getting our funds would be a political disaster for the President," wrote the lobbyist, Tom C. Korologos. "His election will hang for a large part on show of progress in Iraq and without the funding this year, progress will grind to a halt." With administration backing, Congress allocated the money later that year.

There was no evidence in the story that the Times and Pro Publica had offered Korologos a chance to respond, so TPMmuckraker contacted him. He responded in an email:

They did NOT give me a chance to comment. That all came from a 3 page memo I wrote on strategy for passing that first Iraq supplemental in 2003. Some $60 (b) billion was for the military side and $20 (b) billion was for the civilian side. The next sentence said, "The quicker we succeed at CPA the quicker our 150,000 boys will come marching home again."

That response doesn't do much to change the clear impression created by the IG report that Korologos cited President Bush's need to get reelected as a reason to support spending $20 billion of taxpayer money. And that OMB ultimately went along with the request.

Here are some other eyebrow-raising nuggets from the report:

In an illustration of the hasty and haphazard planning, a civilian official at the United States Agency for International Development was at one point given four hours to determine how many miles of Iraqi roads would need to be reopened and repaired. The official searched through the agency's reference library, and his estimate went directly into a master plan. Whatever the quality of the agency's plan, it eventually began running what amounted to a parallel reconstruction effort in the provinces that had little relation with the rest of the American effort.

And...

Money for many of the local construction projects still under way is divided up by a spoils system controlled by neighborhood politicians and tribal chiefs. "Our district council chairman has become the Tony Soprano of Rasheed, in terms of controlling resources," said an American Embassy official working in a dangerous Baghdad neighborhood. " 'You will use my contractor or the work will not get done.'"

And here's a passage that won't exactly boost Donald Rumsfeld's already rock-bottom reputation for knowing what he was talking about:

On the eve of the invasion, as it began to dawn on a few American officials that the price for rebuilding Iraq would be vastly greater than they had been told, the degree of miscalculation was illustrated in an encounter between Donald H. Rumsfeld, then the defense secretary, and Jay Garner, the retired lieutenant general who had hastily been named the chief of what would be a short-lived civilian authority called the Office of Reconstruction and Humanitarian Assistance.

The history records how Mr. Garner presented Mr. Rumsfeld with several alternative rebuilding plans, including one that would include projects across Iraq.

"What do you think that'll cost?" Mr. Rumsfeld asked of the more expansive plan.

"I think it's going to cost billions of dollars," Mr. Garner said.

"My friend," Mr. Rumsfeld replied, "if you think we're going to spend a billion dollars of our money over there, you are sadly mistaken."

In a way he never anticipated, Mr. Rumsfeld turned out to be correct: before that year was out, the United States had appropriated more than $20 billion for the reconstruction, which would indeed involve projects across the entire country.

The report was compiled by Stuart Bowen, a Republican lawyer who serves as the special inspector general for postwar reconstruction in Iraq. The Times and Pro Publica obtained their copies from people outside Bowen's office. The report will be presented February 2nd at a Congressional hearing.

The Daily Muck

The Daily Muck

Natalie Sherman | December 15, 2008, 10:08AM

The Washington Post chronicles yet another example of oversight of the bailout bill. Congress required that executives receive limited bonuses -- but only for those companies that receive federal money through the Toxic Asset Relief Program. Since the Treasury has shifted gears on how to use the money, the pay restrictions "are now all but gone," says Sen. Chuck Grassley (R-IA). (Washington Post)

"The United States government has in place neither the policies and technical capacity nor the organizational structure that would be needed" to successfully rebuild Iraq, according to the draft of a lengthy government report obtained by the New York Times and ProPublica. When progress was slow, government officials invented evidence, such as inflating the number of Iraqi troops, the report finds. So far the effort has cost $117 billion and done little more than "restore what was destroyed during the invasion and the convulsive looting that followed." (New York Times/ProPublica)

The pharmaceutical company Wyeth has become the focus of an investigation by Senator Charles Grassley (R-IA) after it came to light that the company pays ghostwriters to author positive journal articles regarding its products. The inquiry focuses particularly on articles encouraging hormone therapy for menopausal women. (The New York Times)

Read more »

Justice Department

Newsweek Reveals The Story Of The NSA Wiretap Whistle-Blower

Zachary Roth | December 15, 2008, 9:57AM

Newsweek reveals the identity of the previously anonymous source who in 2004 tipped off the New York Times to a secret NSA wiretapping program that was eavesdropping on Americans, and was apparently being concealed from the FISA court which, by law, had to approve such programs.

Thomas Tamm, a veteran prosecutor, learned of the program while working at a Justice Department unit handling wiretaps of suspected terrorists and spies. Here's Newsweek's dramatic description of Tamm's Arlington-parking-garage moment:

For weeks, Tamm couldn't sleep. The idea of lawlessness at the Justice Department angered him. Finally, one day during his lunch hour, Tamm ducked into a subway station near the U.S. District Courthouse on Pennsylvania Avenue. He headed for a pair of adjoining pay phones partially concealed by large, illuminated Metro maps. Tamm had been eyeing the phone booths on his way to work in the morning. Now, as he slipped through the parade of midday subway riders, his heart was pounding, his body trembling. Tamm felt like a spy. After looking around to make sure nobody was watching, he picked up a phone and called The New York Times.

But for Tamm himself, the decision hasn't necessarily worked out well. Reports the magazine:

The FBI has pursued him relentlessly for the past two and a half years. Agents have raided his house, hauled away personal possessions and grilled his wife, a teenage daughter and a grown son. More recently, they've been questioning Tamm's friends and associates about nearly every aspect of his life. Tamm has resisted pressure to plead to a felony for divulging classified information. But he is living under a pall, never sure if or when federal agents might arrest him.

...

Tamm is haunted by the consequences of what he did--and what could yet happen to him. He is no longer employed at Justice and has been struggling to make a living practicing law. He does occasional work for a local public defender's office, handles a few wills and estates--and is more than $30,000 in debt. (To cover legal costs, he recently set up a defense fund.) He says he has suffered from depression.

At the time he made his fateful decision, Tam worked at DOJ's Office of Intelligence Policy and Review (OIPR), which was charged with asking FISA court for permission for national-security wiretaps. But Tamm learned that some wiretap requests bypassed the court and went straight to the Attorney General. These related to what was referred to only as "the program." Though Tamm didn't know it at the time, president Bush had signed a series of secret orders that authorized the NSA for the first time to eavesdrop on phone calls and e-mails between the US and a foreign country without approval by the FISA court.

Here's Newsweek's description of how the program worked:

The NSA identified domestic targets based on leads that were often derived from the seizure of Qaeda computers and cell phones overseas. If, for example, a Qaeda cell phone seized in Pakistan had dialed a phone number in the United States, the NSA would target the U.S. phone number--which would then lead agents to look at other numbers in the United States and abroad called by the targeted phone. Other parts of the program were far more sweeping. The NSA, with the secret cooperation of U.S. telecommunications companies, had begun collecting vast amounts of information about the phone and e-mail records of American citizens. Separately, the NSA was also able to access, for the first time, massive volumes of personal financial records--such as credit-card transactions, wire transfers and bank withdrawals--that were being reported to the Treasury Department by financial institutions. These included millions of "suspicious-activity reports," or SARS, according to two former Treasury officials who declined to be identified talking about sensitive programs. (It was one such report that tipped FBI agents to former New York governor Eliot Spitzer's use of prostitutes.) These records were fed into NSA supercomputers for the purpose of "data mining"--looking for links or patterns that might (or might not) suggest terrorist activity.

Newsweek editors have framed the story as a question: "Is he a hero or a criminal?" reads the sub-hed. But, at least in Tamm's view, we might not have learned about the program had he not made that phone call. Looked at in that light, the answer to Newsweek's question seems clear.