Tuesday, October 27, 2009

Mack Subject of Possible Indictment?

In September and under pressure of a report prepared by the New York State’s Attorney General Andrew Cuomo David S. Mack had to resign from his post with the New York State Police. On September 9, 2009 The New York Times reported that Mr. Cuomo found “that a previous superintendent, James W. McMahon, had been pressured to appoint David S. Mack, a real estate developer and Pataki fund-raiser, to the uniformed post of deputy superintendent, though Mr. Mack had no law enforcement experience. Mr. Mack went on to appear at official functions in a full dress uniform, angering rank-and-file troopers.

So what now? Sources in Albany and close to the State Police say that David Mack is suspected of having used his influence on behalf of friends to “manipulate” official investigations and, in one case, stop or derail an investigation by The New State Insurance Department into a questionable insurance business run by Kenneth D. Yellin. Yellin has worked with MassMutual Life among others. It is believed New York State is reviewing an investment in which Yellin may have worked on credit insurance to enhance investments. Mack is well known for his influence on the Nassau Police Department. Rumors from inside that department are that he has in the past intervened on behalf of friends, some of whom were suspected of drug use far beyond just casual. Having spent much money on police causes locally, he remains influential in Nassau County.

On Septmber 11, 2009 the Times reported also: “Republican fund-raiser and real estate executive who repeatedly took the Fifth Amendment during a state investigation of political interference at the State Police said on Friday that he would resign from his seats on the boards of the Metropolitan Transportation Authority and the Port Authority of New York and New Jersey. The executive, David S. Mack, had refused to cooperate with investigators from the office of Attorney General Andrew M. Cuomo during Mr. Cuomo’s ongoing investigation of the police agency.”

So what is Mack hiding? Sources close to the New York Attorney General say that Mack may have abused his power to award contracts to cronies while also serving on the board of the MTA. He served as Vice Chairman for Procurements. Under investigation, according to sources, is that Mack used his influence to award a $735,000.00 contract to Conti of New York, LLC at a board meeting on April 29, 2009. This is a subsidiary of the Conti Group which has been linked to organized crime in the past. http://www.silive.com/southshore/index.ssf/2009/07/cleanup_of_staten_islands_broo.html

Another area that is also under review is to what extent Mack has used contact with the Securities and Exchange commission of initiate investigations of companies disliked by him. He may also have been able to stop an investigation into Mack Cali Realty Corporation and The Apollo REIT run by family members.

What will happen next is not certain yet. According to some contacts in Albany the New York State Police is now reviewing all actions taken by Mack. What’s more, some sources say that Mack may become subject of an indictment before the end of the year for influence peddling and corruption.

Tuesday, October 20, 2009

Gethner's Special Interest Aides

Treasury Secretary Timothy Geithner chose the best possible talent available to be his aides. Many of them came directly from Wall Street’s most well known banks including Citibank and Goldman Sachs. This group, chosen for their economic prowess was hand picked by the Secretary to help advise on how to correct the greatest economic debacle of our era, ironically, they came directly from the same firms that are being partially blamed for the markets collapse. At issue is the fact that these advisors have access and strong influence behind closed doors at the Treasury department but require no confirmation.

The amount of money they wield control over is staggering, however the oversight for these aides is underwhelming and suspect. These six aides whose official title is, ‘Counselor to Geithner’, oversee and determine policy on $700 billion in banking rescue and are heavily involved in crafting executive pay rules as well as revamping financial regulations. Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.

Defending the policy of appointing advisors Treasury spokesman Andrew Williams said, “the department needs people with a deep understanding of markets and the financial system, especially as it works to fend off the worst recession in half a century. The secretary thought that the best way to utilize their talents was to allow these individuals to provide advice to the secretary on policy issues through appointments as counselor,” He added, “All of Geithners’s counselors are subject to federal ethics rules, including a pledge to avoid contact with their former firms for at least a year.” Many feel that despite these ethics rules this will lead to cronyism and back room deals as the largest banks erstwhile employees form economic policy at the highest levels. In addition, many mock the ethics clause, as it is simply implausible.

The advisors list is a virtual who’s who of Wall Street including: Chief of Staff Mark Patterson the former chief economist at Citigroup and lobbyist for Goldman Sachs. Deputy assistant secretary Mathew Kabaker, worked with private equity firm Blackstone Group LP on domestic finance policy and helped build the Treasury plan to push banks to sell their toxic assets, earned $5.8 million working on private equity deals at Blackstone in 2008 and 2009 before joining the Treasury at the end of January. Much of the compensation was in stock. Other advisors include Gene Sperling, who earned $887,727 from Goldman Sachs last year and over $2.2 million in total and Lee Saks a partner of New York hedge fund Mariner Investment Group, who earned over $3 million in salary and partnership fees last year. Sources on the street think there is no way this group can remain objective when it comes to issues, one in particular that seems glaringly obvious is executive compensation.

The President has promised to change Washington by keeping lobbyists for special interests at a distance and by making decisions in the open. In September, while speaking to financial executives, President Obama warned, “We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.” The unfortunate fact is that this list of Geithner advisors seems very much like its own special interest group for the top tier of American banking firms. They have access, they have influence, they are setting policy and they are doing it all unchecked, behind closed doors. This is far from the promise of the President and makes you wonder, ‘what happened to the transparency we were promised?’

Tuesday, October 6, 2009

Enough Scapegoats: Where Were The Rating Agencies?

In just one week, the trial will begin for two former Bear Stearns hedge fund managers- Ralph Cioffi and Mathew Tannin accused of fraud. However, yesterday, U.S. District Judge Fredric Block denied prosecutors’ request to allow jurors specific information regarding the managers personal spending habits.

“No, I’m not going to allow it,” Block said. “They will know this person made $20 million a year.”

The prosecutors had hoped to introduce the exact membership fee's of the country clubs the manager belonged to as well as Ralph Cioffi's three exotic Ferrari's. Their intent is to persuade the jury that the manager spent significant sums of money on an expensive lifestyle which would have ended once the sub-prime markets crashed and in order to perpetuate this lifestyle, Mr. Cioffi & Mr. Tannin intentionally misled their clients about the health of the sub-prime market.

Cioffi and Tannin are accused of misleading investors in the two hedge funds, the Bear Stearns High-Grade Structured Credit fund and more highly-levered sister fund, about the health of the funds just prior to their collapse, which cost investors $1.6 billion. Cioffi also faces an insider-trading charge. The failure of the two hedge funds, in July 2007, helped precipitate the collapse of Bear Stearns less than a year later, in March 2008.

But many believe that these men and the case itself are being used as scapegoats by regulators and prosecutors both of whom are under tremendous pressure to provide the public with individuals to hold accountable for a systemic collapse. Trillions of dollars have been lost world wide, some of the worlds largest insurance companies, banks, auto makers and financial services titans have been bankrupted. It's glaringly obvious that these men cannot possibly be personally accountable for an international economic crisis.

At the center of the prosecutions case is an email from Tannin, the funds CFO to his friend Ray McGarrigal. According to prosecutors, in an April 22, 2007 e-mail, Tannin lamented the state of his hedge funds, which were heavily invested in subprime mortgage securities.

“The entire sub-prime market is toast,” Tannin wrote. “There is simply no way for us to make money—ever.” A few days later, according to prosecutors, he was lauding the both his funds and the subprime market during a conference call with investors. he commented, that in fact he was, “very comfortable with exactly where we are,” and of regarding the subprime problems, “there’s no basis for thinking this is one big disaster.”

It was an extremely poor choice of words Tannin chose to lament to his friend, but in the end, this is just one friend complaining to another about his dead end job. Imagine their surprise when only a few days later, incompetent regulators befriended by over-zealous prosecutors scouting high and low for scapegoats to sacrifice to the angry, poor huddled masses, gathered a grand jury and turned Tannin's e-mail gripe session with a former colleague, into a massive scenario of fraud.

That's how easily it happens. On Monday, you're a frustrated fund manager complaining about business (perhaps to vehemently) to a colleague. On Tuesday, you do your best to adjust your attitude realizing as always, your fiduciary responsibilities come first. On Wednesday on a conference call you do your best to keep investors calm during an unforeseen and as of yet undefined crisis. Thursday, you are doing your best to gather information on the crisis and on Friday, you've been indicted for committing fraud while becoming the worlds poster-child for the collapse of Bear Stearns.

Perhaps it is time we took a step back and remember before this is all behind us and it's too late, the rating agencies are all clearly at fault. They all failed miserably at their jobs. In fact, failing miserably at their jobs may not be a strong enough term as implies that they did their jobs at all. S&P, Moody's and their cohorts are directly responsible for this crisis. Investors and managers both utilize the ratings agencies in order to gauge the value of their investments. The agencies ratings were wrong which led to investor confusion and over-valuation, which led to the ratings cuts that were deemed too little, too late. the rating agencies couldnt have blundered more if they had tried. This is a fact and is undisputed, yet there have been no arrests, no indictments and it is business as usual for the agencies.

Cioffi and Tannin, like most of those investigated in the aftermath of the credit crisis, are simply scapegoats. Low dangling fruit. Easy to pick and easy to point to. Instead of scapegoats, we should be investigating and then initiating a complete overhaul of the ratings industry. Ratings agencies need to be far more highly scrutinized and in all likely hood far more regulated. We need to weed out those responsible for the financial collapse and replace them with new analysts and new agencies. We must rebuild the portion of the system that failed. Nobody is more responsible and nobody failed more than the rating agencies.