Daily Archives: April 10, 2012

Greg Palast on BP

From the Greg Palast website:

I have been to the Gulf and seen the damage — and the oil that BP says is gone.  Miles of it.  As an economist who calculated damages for plaintiffs in the Exxon Valdez oil spill case, I can tell you right now that there is no way, no how, that the $7.8 billion BP says it will spend on this settlement will cover that damage, the lost incomes, homes, businesses and boats, let alone the lost lives — from cancers, fetal deformities, miscarriages, and lung and skin diseases.

Two years ago, President Barack Obama forced BP to set aside at least $20 billion for the oil spill’s victims.  This week’s settlement will add exactly ZERO to that fund.  Indeed, BP is crowing that, adding in the sums already paid out, the company will still have spent less than the amount committed to the Obama fund.

There’s so much corrosion, mendacity and evil covered up by this settlement deal that I hardly know where to begin.

So, let’s start with punitive damages.

I was stunned that there is no provision, as was expected, for a punishment fee to by paid by BP for it’s willful negligence. In the Exxon Valdez trial, a jury awarded us $5 billion in punitives – and BP’s action, and the damage caused in the Gulf, is far, far worse.

BP now has to pay no more than proven damages. It’s like telling a bank robber, “Hey, just put back the money in the vault and all’s forgiven.”

This case screamed for punitive damages. Here’s just a couple of facts that should have been presented to a jury:

For example, the only reason six hundred miles of Gulf coastline has been slimed by oil was that BP failed to have emergency oil spill containment equipment ready to roll when the Deepwater Horizon blew out. BP had promised the equipment’s readiness in writing and under oath.

And here’s the sick, sick part. This is exactly the same thing BP did in the Exxon Valdez case. It was BP, not Exxon, that was responsible for stopping the spread of oil in Alaska in 1989. In Alaska, decades ago, BP told federal regulators it would have oil spill “boom” (the rubber that corrals the spreading stuff) ready to roll out if a tanker hit. When the Exxon Valdez struck Bligh Reef, BP’s promised equipment wasn’t there: BP had lied.

And in 2010, BP did it again. Instead of getting the oil contained in five hours as promised as a condition of drilling, it took five days to get the equipment in place (and that was done by the US Navy on orders of the President).

This was more than negligence: it was fraud, and by a repeat offender. Now BP is laughing all the way to the bank.

And there’s more. BP mixed nitrogen into the cement which capped the well-head below the Deepwater Horizon. BP claimed to be shocked and horrified when the cement failed, releasing methane gas that blew apart the rig. BP accused the cement’s seller, Halliburton, of hiding the fact that this “quick-set” cement can blow out in deep water.

But, in an investigation that took me to Central Asia, I discovered that BP knew the quick-set cement could fail – because it had failed already in an earlier blow-out which BP covered up with the help of an Asian dictatorship.

The lack of promised equipment, the prior blow-out — it all could have, should have, come out in trial.

Think about it: BP knew the cement could fail but continued to use it to save money. Over time, the savings to BP of its life-threatening methods added up to billions of dollars worldwide. BP will get to keep that savings bought at the cost of eleven men’s lives.

Other investigators have uncovered more penny-pinching, life-threatening failures by BP and its drilling buck-buddies, Halliburton and TransOcean. These include bogus “blow-out preventers” and a managerial system that could be called, “We-Don’t-Care Chaos.”

BP partners and contractors will have to pay $5.4 billion as part of the deal — and BP, not the victims, will keep the entire $5.4 billion. If TransOcean and Halliburton follow suit, BP could walk without paying another dime to victims.

BP had no choice but to pay proven damages and conceded as much. I have learned from inside the plaintiffs’ legal team that this judge was just not going to allow punitive damages; and the Bush-burdened US Supreme Court is just as hostile. (The Supremes cut the Exxon Valdez punitive award by 90%.)

So BP walks without the civil punishment that tort law should provide and justice demands, grinning and ready to do it again: drill on the cheap with the price paid by its workers and the public.

But stopping a trial denies the public more than the full payment due: it denies us the truth, the whole truth and nothing but the truth. There are 72 million pages of evidence from inside BP and industry files obtained by legal discovery in the case which are now likely to follow the rig to the bottom of the sea.

That’s not good. We need the real story.

The lawyers for plaintiffs got all they could get for their clients given the rightward march of the law. Also, there is no doubt that the control of the “$20-billion” spill fund by Kenneth Feinberg, known here in New York as “The Reptile,” the back room choice of Obama and BP, shafted victims by the thousands. Getting the Fund out of his saurian hands is probably the best part of the settlement deal.

But we need to widen the idea of “victim” to beyond those measurably harmed individuals. We are all BP’s victims: because of BP’s and the industry’s addiction to safety fakery from Alaska to the Caspian.

The President has just opened up the arctic waters of Alaska for drilling, has reopened the Gulf to deepwater platforms, and is fiddling with the idea of allowing the XL Pipeline to slice America in half.

So we need to know: Can we trust this industry?

The states of Louisiana and Mississippi could still haul BP into court. Fageddaboudit: neither Louisiana’s Governor Bobby Jindal nor Mississippi’s Phil Bryant, both of the Grand Oil Party, will expose BP. The Obama Administration must be pushed to bring the case to trail in the public interest. Though the history of federal complicity and Obama’s fear of looking like a whale-hugging drill buster suggests a sell-out is in the offing.

Without a trial in the Deepwater Horizon case, we may never get the answer, never get the full story of the prior blow-outs, the fakery in the spill response system, and other profits-first kill-later trickery that bloats the bottom line of BP and the entire drill-baby-drill industry.

***

For more on Palast’s worldwide investigation of BP and the industry in Central Asia, the Gulf, Alaska and the Amazon, read Palast’s new book, Vultures’ Picnic: In Pursuit of Petroleum Pigs, Power Pirates and High-Finance Carnivores at www.VulturesPicnic.org.

Mario Piperni and the Bad Penny

Two Brain Cells and Leaving the Republican Party

April 10, 2012 By

One man’s look back on why it took him as long as it did to finally abandon the Republican party.

I think the meanness of the GOP was a big part of it. The outing people on the internet, the religious fanatics, the attempts to get people fired, the absolute unwillingness to ever admit error, the smearing of Schiavo’s husband, the gay-bashing, etc.

But again, I will never know why it took so long. It’s not easy looking at everything you thought you knew and saying “Wow, was I ever full of shit.” But eventually, if you have two remaining brain cells bouncing around your thick noggin, the amount of evidence becomes unavoidable and undeniable.

Even for someone who voted for Bush twice.

Reason to hope, right?

When Will We Ever Learn?

The Silver Anniversary of the “Keating Five” Meeting – Citizens United’s Precursor

Yves [Smith, Naked Capitalism] here. One of the themes in this Bill Black post is that a senior official who understands the importance of effective regulation can have an impact in a relatively short period of time. It’s important to keep that in mind as a reminder that the obstacle to reining in banks isn’t feasibility but lack of political will.

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

April 9, 2012 is the twenty-fifth anniversary of the most infamous savings and loan fraud, Charles Keating’s, successful use of five U.S. Senators to escape sanction for a massive violation of the law. The Senators were Alan Cranston (D. CA), Dennis DeConcini (D. AZ), John Glenn (D OH), John McCain (R. AZ), and Donald Riegle (D. MI). They became infamous as the “Keating Five.” I was one of four regulators who attended the April 9, 1987 meeting. I took the notes of the meeting, in transcript format, that were so detailed and accurate that the Senators testified that they were sure I had tape recorded the meeting. (The reality is that I owe my note taking abilities to Bill Valentine, my high school debate coach, and experience debating for the University of Michigan.)

Reviewing my (near) transcript of the April 9 offers a large number of important lessons that would have allowed us to avoid future crises. We suffered the crises because we ignored all the lessons about which approaches are criminogenic and which are successful. The transcript shows four things that work. First, we were apolitical as regulators. I worked closely in the same regional office with my three regulatory colleagues for years, but I do not know their political affiliation (if any). We went after the S&L frauds and their political cronies regardless of party. Second, we were vigorous and fearless enough as regulators that the frauds (e.g., Keating) feared us. Keating knew that despite his fearsome political power and reputation for trying to ruin his opponents we (the regional S&L regulators based in San Francisco) would never back off.

Third, we were effective. The April 9 meeting exemplified how a largely ineffective office had improved greatly in two years. Ed Gray, the head of the Federal Home Loan Bank Board, inherited an agency driven by an anti-regulatory dogma that was actively making things worse. Gray had been a strong supporter of deregulation. Gray’s great virtue is that he listened to the facts and looked for patterns. What he realized was that the large failures followed a consistent pattern. They were (to use modern criminology jargon) “control frauds” – seemingly legitimate entities controlled by officers who used them as “weapons” to defraud the S&L’s creditors and shareholders. Gray knew that S&Ls that were still open and followed the same pattern were growing at an average annual rate of 50% and that hundreds of similar S&Ls were entering the industry annually. Gray perceived, correctly, that business as usual would produce a catastrophe.

Gray began to reregulate the industry in 1983. That was extraordinary on several dimensions. The Garn-St Germain bill (drafted by Gray’s predecessor, Richard Pratt) that deregulated the S&L industry was enacted in 1982. It passed with one opposing vote in each chamber. For Gray to begin to reregulate the industry only a year later was an enormous repudiation of the will of the Congress, the Reagan administration, neo-classical economics, the anti-governmental zeitgeist, and the agency’s traditional position. It also required Gray to reverse his embrace of deregulation. To succeed in his push to reregulate the industry Gray had to take on, simultaneously, the House, the Senate, the administration, the S&L trade association (rated the third most powerful in America by some political scientists), economists, much of his own agency, and the media. Astonishingly, Gray’s reregulation succeeded and because it was so prompt it contained the crisis and prevented a trillion dollars in fraud losses and a Great Recession.

By contrast, reregulation began in the current crisis in 2009 (the effective date of the Federal Reserve’s rule finally banning liar’s loans (fraudulent mortgage loans made without verifying the borrower’s income). The nine year-to-ten year delay in reregulation (measured from passage of Gramm-Leach-Bliley (1999) or the Commodities Futures Modernization Act (2000) allowed fraud to become epidemic and hyper-inflate the financial bubble, producing the Great Recession.

One of the early rules Gray pushed to stem the crisis restricted “direct investments” e.g., taking an equity risk rather than making a conventional loan). This was the rule that served as the flashpoint for the Keating Five meeting. Gray realized that he needed to resupervise the industry as well as reregulate it. Gray doubled the number of examiners and supervisors – in 18 months. He personally recruited the two individuals with the best reputation in the U.S. as effective financial regulators, Joseph Selby and Michael Patriarca, to serve respectively as the top field regulators in our Dallas and San Francisco office, which had jurisdiction over Texas, California, and Arizona – the epicenters of the S&L fraud crisis. James Cirona, the President of the Federal Home Loan Bank of San Francisco (FHLBSF), strongly supported Patriarca and made the crackdown on the frauds his top priority. The Bank Board in general and the FHLBSF in particular rapidly became far more effective regulators, particularly with respect to frauds like Keating. The four regulators at the April 9 meeting were Cirona, Patriarca, Richard Sanchez (Lincoln’s “Supervisory Agent”), and me.

Our examiners and supervisors discovered and documented Lincoln Savings’ officers’ frauds and resultant disastrous direct investment and lending practices. Bart Dzivi’s discovery of Lincoln Savings, Drexel Burnham Lambert (dominated by Michael Milken), and Arthur Andersen’s (AA) combined fraud is one of the great finds of all time. In the course of reviewing thousands of pages of seemingly routine underwriting documents on junk bonds he noticed that some of the pages were not numbered sequentially and that in one or two files (out of hundreds) the purportedly contemporaneous (and carefully undated) underwriting documents contained information that became available only after the purchase of the junk bonds. Dzivi realized that the most likely explanation was that the supposed underwriting documents were created after the fact and then stuffed into the files to make it appear that Lincoln Savings engaged in underwriting before it purchased junk bonds. Dzivi’s insight prompted an enforcement investigation led by Anne Sobol that proved the file stuffing and discovered and document widespread forgeries of documents and signatures designed to cover up the massive violation of the limits on direct investments.

Dzivi’s and Sobol’s findings added to the examiners’ findings about Lincoln Savings’ losses and its massive violation of the “direct investment” limits to establish a case for taking an enforcement action, or placing Lincoln Savings in conservatorship, that would lead to Keating losing control over the S&L and facing lawsuits and prosecution.

Keating was amazed and distraught that we discovered and documented these frauds and he knew that we would make criminal referrals that could send him to prison. Being prosecuted was a very serious risk. The San Francisco office was the most aggressive office in closing fraudulent S&Ls and making criminal referrals. We were building a staff of attorneys and investigators expert in discovering, documenting, and punishing fraud. Chris Seefer became our lead investigator, a far more than full time job. Despite insane hours, he put himself through night programs and earned an MBA and then a J.D. Keating was used to regulators and politicians fearing him, he was not used to fearing the regulators.

Fourth, we understood modern finance theory – and we knew it was false, indeed, absurd. We also called its predictions false in blunt, non-bureaucratic language. Consider this exchange between Senator DeConcini and Michael Patriarca. (I have edited it slightly for the sake of brevity, but it is important to know that during the exchange Patriarca informed the Senators that we were making a criminal referral against Lincoln Savings’ senior officers. Patriarca also explained that the S&L’s outside auditor, Arthur Young, had given a “clean” audit opinion despite an accounting treatment that allowed an absurd $12 million revenue recognition for a deal that was unwound.)

McCAIN: Why would Arthur Young say these things about the exam – that it was inordinately long and bordered on harassment?

DECONCINI: Why would Arthur Young say these things? They have to guard their credibility too. They put the firm’s neck out with this letter.

PATRIARCA: They have a client.

DECONCINI: You believe they’d prostitute themselves for a client?

PATRIARCA: Absolutely. It happens all the time.

Note that DeConcini phrased his question in a manner designed to force Patriarca to back off his criticism of Arthur Young (AY) – what regulator would dare tell a group of U.S. Senators that AY, one of the most prestigious audit firms in the world, would act as a “prostitute”? I cannot convey to you how startled the Senators were. They expected to be leaning on four field regulators. Five U.S. Senators against four regional bureaucrats is equivalent to the sending the NBA champions, playing at home, against an NCAA Division III college basketball team. The Senators had clearly never seen anything like us. Patriarca was always an outstanding leader, but this was his finest five minutes.

[It is a testament to how fraud-friendly the federal judiciary has become that a prominent jurist, the Seventh Circuit’s Judge Easterbrook, has written opinions requiring the dismissal of complaints against outside auditors on the basis that Easterbrook assumes that it would be “irrational” for a prestigious audit firm to ever give a clean opinion to fraudulent financial statements because doing so would harm their valuable reputation. Easterbrook based this assumption on (long falsified) economics dogma, not facts. Patriarca’s statement was based on facts. Patriarca’s statement was publicly available and supported by the criminology literature and key economics findings. Easterbrook ignored the inconvenient facts, research findings, and theories that had long since falsified the dogma that supplied Easterbrook’s assumption that markets automatically exclude fraud. Similarly, Easterbrook ignored the findings of the national commission that investigated the causes of the S&L debacle that reported on how the S&L “control frauds” created the “Gresham’s” dynamic that drove good auditing out of the profession.]

We should have learned from the April 2 meeting how devastating corporate money could be. Keating used four means to recruit the Senators who became known as the “Keating Five,” but they all depended on spending money. One must always remember that a large contribution from a Senator’s perspective represents chump change from a corporation’s perspective. Keating used Alan Greenspan as a lobbyist who walked the halls of the Senate to enlist the Senators as Keating’s allies. He used Greenspan as a famous name to make economics reports hostile to the direct investment rule appear more prestigious. Greenspan supported Lincoln Savings’ request to make enormous amounts of direct investments, opining that it “posed no foreseeable risk of loss.” (It was the most expensive S&L failure.) Greenspan added his prestige to a study by George Benston; whose study of the 34 S&Ls that made significant amounts of direct investments led him to conclude that the agency should urge other S&Ls to emulate the 34 S&Ls. Two years later, each of the 34 S&Ls he praised had failed. Keating, of course, touted to the Senators the Greenspan and Benston praise for direct investments.

Keating used money to secure letters of support from two top tier audit firms, which he then used to recruit the Keating Five. Keating got the letters from AA and AY. Money was his underlying weapon, but the cases are distinct. Keating spent huge amounts of Lincoln Savings’ money on his expensive outside lawyers. AA decided to resign as Keating’s outside auditor, which would normally be a bright red flag of potential accounting and securities fraud. Keating perverted a warning signal into an assault on the regulator by threatening to sue AA for resigning the account unless it agree to sign a resignation letter, drafted by Lincoln’s lawyers, attacking the agency. To its shame, AA gave in to this extortion. (AA created the phony underwriting documents that Lincoln Savings then inserted in its files to deceive the regulators.)

AY replaced AA as Keating’s outside auditor. The AY audit partner, Jack Atchison, signed an extraordinary screed on AY letterhead – on behalf of AY (he signed as “AY” rather than signing his name). Landing such a huge client was Atchison’s greatest coup. Becoming a top “rainmaker” is the route to promotion, prestige, and power in modern audit and legal firms. Snagging Lincoln Savings as a client stood to make Atchison even wealthier because Keating was soon offering to triple his salary and bring him in-house. Atchison accepted the offer.

Keating primarily recruited the Keating Five, however, through the most traditional of means – large political contributions (implicitly) paid for by the government. He maximized the contributions through two traditional tactics. Lincoln Savings’ officers received exceptional compensation. They were expected to make large contributions to entities Keating favored. Keating took credit for these contributions by “bundling” them together and delivering them to the politician. Keating also gave “soft” money to funds to benefit Senators Cranston (voter registration) and Glenn (retiring his campaign debt). Similarly, Speaker of the House James Wright, Jr. did favors for the worst Texas S&L frauds after they made campaign contributions to the Democratic Congressional Campaign Committee (DCCC). The underlying commonality is that the most fraudulent firms have the greatest incentive to use political contributions to secure immunity from effective regulation and prosecution. Money is no object to a CEO that is looting “his” firm. Keating bragged that he spent $50 million in 2007 in legal, accounting, and lobbying fees to fight our examination findings about Lincoln Savings. My saying during the S&L debacle was that for a looter the highest return on assets was always a political contribution.

Senator McCain was unique among the Senators in having a family financial interest in Lincoln Savings securing immunity from sanctions for its violation of the direct investment rule. His wife and father-in-law (the source of his family wealth) were engaged in a large direct investment with Lincoln Savings. If we enforced the rule the McCain family and his father-in-law were likely to suffer severe losses.

Senator McCain, of course, was chastened by the Keating Five experience and later, with Senator Feingold, introduced legislation to restrain campaign finance’s abuses. The Supreme Court gutted the reform effort in its Citizens United decision.

Keating’s frauds should have also warned us against the recently passed JOBS Act. One of the problems we had in getting the public to treat the growing S&L crisis as a crisis was that federal deposit insurance meant that there were few obvious individual victims. Keating put a face on the crisis. He caused Lincoln Savings’ insolvent holding company (ACC) to fraudulently issue worthless junk bonds – sold out of Lincoln’s branches under a special SEC exemption for issuers of securities who do not sell through investment bankers. Lincoln Savings targeted retirement communities for these sales. Tens of thousands of California widows were victims of Lincoln and ACC’s frauds. The S&L debacle now had a face, and it was our grandmother’s face. The JOBS Act will encourage frauds against the most vulnerable members of our society.

It is remarkable that Bank Board Chairman Gray refused the Senators efforts to coerce a deal to immunize Lincoln Saving’s violation of the direct investment rule given the Senators’ exceptional political leverage. Our only hope to restore remotely adequate funding to close the frauds depended on support for the FSLIC Recapitalization bill in the Senate (we had just been crushed in the House in March 1987 by combination of the “Faustian Bargain” between the S&L industry’s trade association and the representatives of the S&L control frauds and the deal between Speaker Wright and the Reagan administration not to reappoint Chairman Gray upon the expiry of his term at the end of June 1987. The latter deal led to Senator Garn’s protégé, M. Danny Wall, becoming Bank Board Chairman. Wall promptly took a series of unprecedented actions to placate Keating’s political cronies (which soon include Speaker Wright). He ordered an end to the examination and investigation of Lincoln Savings. When we persisted in recommending that Lincoln Savings be placed in conservatorship he removed our jurisdiction over Lincoln Savings and agreed not to take any enforcement action against the massive violation of the direct investment rule. The result was the looting of the widows. Lincoln Savings’ frauds were so pervasive that it used its impunity from meaningful enforcement to become the most expensive financial failure in our history.

Ultimately, we blew the whistle on Wall, Speaker Wright, and the Keating Five. Wall and Wright resigned in disgrace. The Keating Five received minimal ethics sanctions, but they were deeply embarrassed. The Bush (I) administration decided to make the prosecution and sanctioning of the elite frauds that drove the debacle a top priority. It resumed and even expanded many of Gray’s policies (particularly in enforcement and supporting criminal prosecutions). Accounting control fraud is a weapon of mass financial destruction. When it is not blocked by effective regulation and prosecution it becomes a mass destroyer of employment.

Gray and Selby (who Wall forced out of office to curry favor with Speaker Wright) chose to give up their careers – at the peak of their careers – to save the nation from catastrophe. Brooksley Born (CFTC Chair) did much the same in the run up to the current crisis. The overwhelming majority of financial regulatory leaders appointed by the most recent Bush administration were chosen because they were leading opponents of regulation. They created a self-fulfilling prophecy of regulatory failure. We will know that an administration is serious about financial reform when it appoints Mike Patriarca, Chris Seefer, and Bart Dzivi as regulatory and enforcement leaders. The key lesson that Gray and Patriarca understood is that it was essential to hire willing to four Senators (Cranston was managing a bill on the floor of the Senate when the exchange happened) that of course some AY audit partners would prostitute themselves for a fraudulent client – “it happens all the time.” Let’s hire people as regulators and prosecutors with a track record of success, integrity, and courage. The problem is that recent administrations have preferred to appoint the people with a track record of failure and poor integrity. The reason for that preference is the old accounting joke – pick the audit partner who responds to the interview question (“what is two plus two”) by saying: “what would you like it to be”? The joke, of course, is an admission that professional prostitution is far too common among audit partners.

I call on President Obama to recognize the hero of the silver anniversary of the Keating Five meeting by appointing Michael Patriarca as head of the Office of the Comptroller of the Currency. We need regulators who will live out the famous credo of the Friends (Quakers): “speak truth to power.”