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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.

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.


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 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)

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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.

Since the complaint against Rod Blagojevich was made public Tuesday, we've been wondering about the identity of the "Tribune Financial Adviser" who is said to have met with John Harris, the governor's then chief of staff, about the possibility of firing Tribune editorial writers who had been critical of Blagojevich.

Now the Tribune itself is reporting that it's Nils Larsen, a Tribune exec and managing director of the Equity Group, a private investment group started by Tribune CEO Sam Zell. Larsen has been interviewed by the FBI, adds the paper.

Larsen had been at the top of our list of suspects. The complaint says that the person is someone mentioned in media reports as a top financial adviser to Zell, who played a major role in Zell's purchase of the Tribune Company.

And Larsen appears to fit the bill. Consider this paragraph from a profile in Chicago Business last year:

Mr. Larsen, 37, is a managing director at Equity Group Investments LLC, Chicago billionaire Sam Zell's private investment firm -- and the company that will lead Tribune Co. when it goes private later this year. He's been Mr. Zell's point man in arranging and negotiating $11.2 billion in financing for the deal, scoping the future of Tribune's 23 television stations and running the sale of the Chicago Cubs.

We called Larsen yesterday to ask if he was the financial adviser named in the charging documents, but he didn't respond. He didn't respond to the Tribune either, and neither did Zell.

The paper adds that the feds have also issued a subpoena to the Tribune Company (probably wasn't hard for them to get the scoop!), seeking memos that might shed light on the governor's apparent efforts to get the editorial writers fired.

James Hirni, the former lobbyist who was charged last month in connection with the wide-ranging Jack Abamoff probe, pleaded guilty today to providing an all-expenses paid trip to the World Series in New York to two congressional staffers, including entertainment at a strip club and a chauffeur-driven SUV.

Hirni was at the time a lobbyist for an equipment rental company that was pushing legislation in Congress. He recently was fired from his job doing "Republican outreach" for Wal-Mart, after news of the charges surfaced.

One of the two staffers who received the free trip, Trevor Blackann, a former aide to GOP senator Kit Bond, pleaded guilty last month to failing to disclose the trip on his tax returns.

Hirni's lawyer last month told that Hirni is cooperating with prosecutors, suggesting that the feds are still working to build cases against bigger fish.

We told you Wednesday about the developing fight over the pace of confirmation for Eric Holder, Barack Obama's nominee for Attorney General. And it looks like it's heating up.

Politico reports that several Senate GOPers took the floor of the chamber last night to agree with Arlen Specter, the ranking Republican on the Judiciary committee, who has argued that the January 8th start date for confirmation hearings, set by Democrats, doesn't allow for enough time to scrutinize Holder's record -- in particular his role in the controversial pardon of Marc Rich in the last days of the Clinton administration.

Minority Whip Jon Kyl said:

Nobody is talking about a long, long, long delay. We do ask that we be accorded the same consideration that was given to others in this situation and that there be adequate time to confirm him.

And another Senate Republican, Charles Grassley, agreed:
I understand the Judiciary Committee has a large number of boxes of archived documents relating to his employment at the Justice Department and those materials need to be reviewed. We haven't even gotten Mr. Holder's questionnaire, nomination materials or F.B.I. background investigation yet.

But Democrats fired back in support of Pat Leahy, the Judiciary chair who's pushing to begin hearings quickly.

Sheldon Whitehouse, who sits on the Judiciary committee, argued that the schedule was not out of keeping with precedent. He said that the average time between a presidential announcement of a nominee and the first hearing has been 29 days. If the Holder hearings began January 8th, that would be 38 days after the nomination was announced on December 1st.

And now Leahy himself has issued a lengthy statement reiterating his desire to stick to the January 8th start date.

Leahy argues that the politicization of the department under Bush makes it especially crucial to move quickly:
This is no ordinary time. Over the last eight years, political manipulation and influence from partisan political operatives in the White House have undercut the Department of Justice in its mission, severely undermined the morale of its career professionals, and shaken public confidence in our Federal justice system. Never has it been more important to have an experienced hand as Attorney General. I hope our Republican members will resist the temptation toward partisanship and join with us to consider this appointment fairly and promptly.

Leahy even dredges up an old quote from a Senate Republican, from last year when GOPers were pushing for quick hearings on President Bush's nominee, Michael Mukasey. "Attorney general nominees have been confirmed, on average, in approximately three weeks, with some being confirmed more quickly," said one Republican at the time, according to Leahy.

Late Update: More on that quote from last year, just dredged up today by Pat Leahy, in which a Senate Republican argues for a quick confirmation for Bush AG nominee Michael Mukasey. Turns out the quote was from none other than Jon Kyl, who now is stressing the dangers of a quick process for Holder. Thanks to reader CR for the tip.

You might have seen the news that a former chair of the Nasdaq was arrested yesterday for running what federal investigators called a "$50 billion swindle."

Bernard Madoff was turned in by his sons, who said that their father had admitted to them that his investment advisory business was "a giant ponzi scheme," reports the Wall Street Journal.

But a close look at what happened suggests that Madoff's alleged crime may merely have represented an extreme version of the type of financial chicanery that helped cause the current economic crisis.

In a criminal complaint, an FBI agent wrote that Madoff, 70, had:

deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.

Madoff's firm, Bernard L. Madoff Investment Securities, serves primarily as a middleman between buyers and sellers of shares. But an offshoot of the company manages investments for hedge funds and other institutions, as well as wealthy individuals. According to a civil complaint filed by the SEC, the alleged fraud was run through this investment business.

The steady returns that this business provided appear to have caused skepticism over the years. The Journal reports:
A number of traders suggested [Madoff's] firm could be buying shares for its own account just before it filled orders for customers, an illegal act called front-running. In 2001, Mr. Madoff told Barron's that charges of front-running were "ridiculous."

An executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May 1999, urging regulators to investigate Mr. Madoff. Mr. Markopolos continued to pursue his accusations over the past nine years, he said in an interview on Thursday, and according to documents he sent to the SEC that were reviewed by The Wall Street Journal.

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.

The criminal complaint filed by the FBI quotes two employees -- believed to be Madoff's sons -- as saying that Madoff was "cryptic" about the activities of the company's investment arm, and kept the investment offices on a separate floor.

Things appear to have come to a head earlier this month, when Madoff told one of his sons that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."
[On Wednesday] the sons met with Mr. Madoff ... at his Manhattan apartment, the complaint says.

...At the apartment, Mr. Madoff confessed that his business was a fraud and that he was "finished." He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." He told them the firm was insolvent, according to the complaint.

In other words, Madoff got himself into a situation where he didn't have enough money to pay back investors -- jut like those Wall Street banks we just bailed out. That's not to say that the charges against Madoff aren't serious -- it's only to point out that they're not unconnected to the broader economic turmoil.

Madoff, who is said to have started his business with $5000 he saved from working as a lifeguard at Rockaway Beach, didn't enter a plea during a court hearing last night. A preliminary hearing is scheduled for Jan. 12, 2009.

Did Rahm Emanuel speak to Rod Blagojevich about the governor's plans to fill the Senate seat left open by Barack Obama?

That's what a Fox affiliate in Chicago has reported, based on "a source familiar with the investigation" into the Illinois governor.

Fox Chicago News reports that Emanuel, the Chicago congressman who was appointed shortly after the election to be Obama's White House chief of staff, had "multiple conversations" about the issue with the governor himself and with Blagojevich's chief of staff, John Harris -- who this week was charged along with his boss.

The source said it was likely that these conversations were recorded, since they took place after the federal wiretaps had begun.

Of course, it would not be surprising if Emanuel had spoken to the governor about options to fill the seat. Fox Chicago said that the source didn't say whether those conversations involved any quid pro quo or dealmaking.

Obama yesterday pledged to canvass his staff about conversations with Blagojevich's office over the seat, and disclose what he finds out soon. Obama said that none of his staff had discussed any kind of deal for the seat.

Looks like David Axelrod is trying to push back against talk that Valerie Jarrett, a close friend and adviser to Barack Obama, may have abruptly pulled out of the contest for the president-elect's Senate seat because she had an idea of how the governor was approaching the task of filling the seat.

Bloomberg reports that Axelrod, Obama's top strategist, told an audience last night at Harvard's Kennedy School of Government:

[Obama'] preference was always that she serve in the White House, and ultimately he expressed that to her and said look, 'I just need you,' and that's why she made that decision.

Jarrett withdrew from contention days after a Nov. 10 conference call where, according to charging documents filed by prosecutors, Blagojevich talked about appointing "Senate Candidate 1" in exchange for his wife getting a corporate board appointment. Soon afterwards, Jarrett was announced as a White House adviser to Obama.

The Chicago Tribune has identified Jarrett as Senate Candidate 1.

Axelrod added:
No one in their wildest imagination could have imagined the scenario that ensued. There's a vacancy, the governor, apparently, in the complaint of the government had some ideas about what to do with it. We were not involved in that discussion or any discussion of that nature.