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Top MuckReads: Errant Alaskan Rescue, Nuclear Waste and Mitt’s Money
Pro Publica - January 20, 2012 - 3:02pm
by Daniel Victor
Here are this week's top must-read stories from #MuckReads, ProPublica's ongoing
collection of the best watchdog journalism. Anyone can contribute by tweeting a link to
a story and just including the hashtag #MuckReads or by sending an email to
MuckReads@ProPublica.org. The best submissions are selected by ProPublica's editors
and reporters and then featured on our site and @ProPublica.
Is riveting Alaska icebreaker voyage a humanitarian or economic mission?
Alaska Gov. Sean Parnell urged the federal government to green-light an exceptional
sea voyage to a remote community that he said was in danger of running out of fuel.
But people were not in immediate, if any, danger, and critics say the much-celebrated
mission mainly benefited a nearby goldmine.
Contributed by @alaskadispatch
Romney Parks Millions in Cayman Islands, ABC News
Mitt Romney has millions in investment funds set up in the Cayman Islands, but it is not
apparent on his financial disclosure firm. A Romney spokesperson said Romney would
pay the same in taxes regardless of where the funds are based.
Contributed by @ABC
Science Funding Slashed Under Corbett Administration, StateImpact
Pennsylvania Gov. Tom Corbett’s administration has diminished funding for scientific
research at a time it says it’s basing its Marcellus Shale drilling policies on sound
science. Projects examining the impact of drilling and climate change were removed
from a recommended funding list.
Contributed by @StateImpactPA
In D.C. loan program, mortgage defaults abound, The Washington Post
D.C. is giving low-income buyers subsidies for homes they can’t afford. Nearly one in
five of the homeowners is behind on mortgage payments — three-times the overall rate
in the region.
Contributed by @j_nb
Problems plague cleanup at Hanford nuclear waste site, USA Today
A 10-year effort to clean up 56 million gallons of radioactive nuclear waste “faces
enormous problems just as it reaches what was supposed to be its final stage.” Design
problems could halt operations before much of the waste is treated.
Contributed by Brad Heath
In the super PAC era, do handshakes even matter? Associated Press
Political ad spending correlates more closely with election results than any other known
factors, including a town’s political party makeup and frequency of candidate visits.
Contributed by @iWatch
These stories and many more can be found at ProPublica. You can also subscribe to a
daily #MuckReads email or follow ProPublica on Twitter. Reader submissions are key to
making #MuckReads a success — please contribute!
Categories: Media, Politics
Years After Evidence of Fracking Contamination, EPA to Supply Drinking Water
to Homes in Pa. Town
Pro Publica - January 20, 2012 - 2:58pm
by Abrahm Lustgarten
First, the earth around the rural town of Dimock, Pa., was cracked open as gas
drillers used fracking to tap the vast energy supplies of the Marcellus Shale.
Then, in April 2009, residents there lost their access to fresh drinking water.
Wells turned fetid. Some blew up. Tap water caught fire.
Now, nearly three years later — and after a string of lawsuits and state investigations
has ushered Dimock to the forefront of the environmental debate over drilling but
failed to resolve the water problem — the Environmental Protection Agency is stepping
in to supply drinking water itself.
On Friday, the agency announced it would bring tanks of drinking water to four
homes, including that of Julie Sautner, whom ProPublica first interviewed
about her water problems in 2009.
“Data reviewed by EPA indicates that residents’ well water contains levels of
contaminants that pose a health concern,” the agency said in a statement. Tests
showed dangerous levels of arsenic, a carcinogen, as well as glycols and barium in at
least four wells, and the EPA is apparently concerned that the contamination may be
According to the statement, the EPA plans to test the water supplies in 60 additional
homes for hazardous substances.
In 2009, Pennsylvania officials charged Cabot Oil & Gas, the company that
drilled the wells in Dimock, with several violations it said had contributed to
methane gas leaking out of the gas wells and into drinking water. For a time,
Cabot supplied drinking water to a number of homes in the area but then
The EPA has waded into the Dimock issues slowly over the past few months,
provoking a defensive stance from the state’s lead environmental regulator,
who earlier this month called the EPA’s understanding of the Dimock situation
But the state has not undertaken the scope of water analysis the EPA now plans to do,
and until the EPA stepped in Friday, Dimock residents had found little resolution.
Environmental groups are applauding the EPA’s move. "This finding confirms what
Dimock residents have said for months, that the Pennsylvania Department of
Environmental Protection should have never allowed Cabot to end deliveries of clean
water," said Environmental Working Group senior counsel Dusty Horwitt.
But they also say the time has come for the EPA to address water contamination
concerns in other communities across the country where residents say drilling has
harmed their water.
In December, the EPA concluded that fracking was likely to blame for a similar
rash of groundwater contamination in Pavillion, Wyo. The agency is conducting
a multiyear national study of fracking’s effects on water supplies.
We have previously reported about water and drilling concerns in parts of
western Wyoming, as well as central and southern Colorado, Texas, Ohio and
Categories: Media, Politics
Two Days, Two Good Investigations From Mollenkamp
CJR Daily - January 20, 2012 - 2:31pm
Carrick Mollenkamp is getting his post-WSJ days off to quite the start. On Wednesday,
he wrote, with Lauren Tara LaCapra and Matthew Goldstein, a tough Reuters story
headlined "In MF Global, JPMorgan again at center of a financial failure." And yesterday
ProPublica published a Mollenkamp investigation into Deutsche Bank's CDO desk,
"Deutsche Analyst Sounded Alarm When Asked to...
In the Gusher of Super PACs, Even One Named ‘The Internet’
Pro Publica - January 20, 2012 - 1:53pm
by Kim Barker
Sure, there’s the GOP symbol, but the real elephant in the room at any of the
Republican debates since December has been the super PAC, the turbocharged political
action committee able to raise and spend unlimited amounts of money on political ads
— as long as that spending isn’t coordinated with a particular campaign.
Mitt Romney supporters used Restore Our Future to tank Newt Gingrich in Iowa, while
Gingrich supporters relied on Winning Our Future for revenge in South Carolina.
Jon Huntsman’s campaign would probably not have lasted as long as it did without Our
Destiny. Now that Rick Perry is out of the race, throwing his support to Gingrich, the
real question is what will happen to the war chest of Make Us Great Again.
But those are just the super PACs you’ve already heard about — the ones that
candidates grouse about at debates, with Romney calling one Winning Our
Future ad that portrayed him as a corporate raider “probably the biggest hoax
As the countdown continues to the South Carolina primary Saturday, it’s worth taking a
step back and considering all the confusing names, and all the confusing money that
might be spent in the coming months. It’s also worth considering how we got to this
new frontier, which even campaign operatives say is messy: Two years ago on Saturday,
the Supreme Court, in its ruling on Citizens United vs. FEC, cracked open the door for
super PACs. Two months later, a federal appeal court’s decision in Speechnow.org vs.
FEC threw it wide open. Now, registering as a super PAC is as simple as sending a letter
and a form to the FEC.
So far, at least 283 super PACs have registered, although 60 are run by one Florida man,
Josue Larose, and seem to serve no other purpose but piling up paperwork for the FEC.
And so far, super PACs have spent more than $29 million on the presidential race. (You
can follow the money with our PAC Track application.) Although it’s not yet clear how
that compares with overall spending by the candidates themselves, reports indicated
that super PAC spending in Iowa outstripped the candidates' by 2-to-1, said Paul Ryan, a
lawyer with the Campaign Legal Center.
More spending, likely the most ever in an election season, is on the horizon.
And even though some super PACs seem to be parodies (like comedian
Stephen Colbert's Americans for a Better Tomorrow, Tomorrow, which has
probably done more to deliver “super PAC” into the American lexicon than any
politician), the groups insist they are real.
“There’s all kinds of games going on,” said Fred Wertheimer, president of Democracy
21, a nonprofit pushing to rein in super PACs. “Some group has put up a website telling
you how to get around disclosure. Look, we have huge problems on our hands, and we
get to celebrate the cause of many of these problems on Jan. 21, the second
anniversary of the Citizens United decision. We have to deal with them as best we can.”
Here’s a rundown of some new super PACs and examples of how confusing things can
The Patriot Super PAC, which registered with the FEC on Tuesday, boasts a website
promising to be the “future home of something quite cool.” It will work to defeat
President Barack Obama, but it shouldn’t be confused with the conservative Patriot
PAC, which promises to be the “point of the spear” and asks people to sign a petition
without providing the text. Nor should either be mistaken for the Patriot Majority USA
PAC, which supports Senate Democrats.
Protecting Our Vote PAC registered on Jan. 13, with one of the best signatures in any
super PAC filing. Its mission is unclear: The website simply says, Protecting Our Vote
PAC. American Sunrise registered as a super PAC the same day, organized in part by
Lora Haggard, the former chief financial officer for onetime Democratic presidential
candidate John Edwards.
Citizens for Prosperity and Good Government, not to be confused with the nonprofit
conservative advocacy group Americans for Prosperity, registered on Jan. 10.
Some people registering super PACs appear to be confused themselves.
Patricia McBride of Wasco, Calif., registered Citizens Fireup Super PAC on Jan. 9
to support or oppose Obama but neglected to say which angle she’ll take.
McBride also wrote that she wished to establish the super PAC as a (c4), which
is shorthand for a 501(c)4, the IRS code for a social-welfare nonprofit. Although
501(c)4s are allowed to make certain political expenditures, they are not
allowed to be super PACs. Regardless, the FEC appears to have registered the
On Jan. 5, a super PAC called “a SuperPAC” registered with the FEC, with a website at
www.asuperpacforhire.com, which includes a way to donate. It also features the
explanation: “Have you ever wanted a message to get out to the voting public about a
candidate running for federal office but didn't want the mess of production,
compliance, or disclosure paperwork? a SuperPAC wants to get the TRUTH out too.”
Treasurer Matthew Balazik of Frederick, Md., said the group is real. Ads on its
website, which proclaim “Paid for by a SuperPAC,” target Democrats who’ve
“We’re pretty conservative around here,” Balazik wrote in response to an email. “We
believe fundamentally that you should be able to speak publically (sic) and
anonymously so long as you do not violate anyone else’s rights.”
When asked if anyone had tried to hire a SuperPAC super PAC, Balazik wrote simply:
“That’s a good question.”
On Jan. 4, “The Internet” registered as a super PAC. Unfortunately, its website doesn’t
appear to be working, but it does raise the specter of ads proclaiming, “paid for by The
On Dec. 22, the Real Leader PAC registered as a super PAC, with a website that still
leads to nowhere.
The previous week, Cain Connections PAC registered as a super PAC, with no
website, days after Herman Cain had dropped out of the Republican race. Its
mission is unclear.
Earlier in December, the American Crosswinds PAC— sounding remarkably similar to
the Republican fundraising juggernaut American Crossroads super PAC — registered as
a super PAC, although it has no website and no email address.
On Dec. 1, Feel the Heat PAC registered from a Washington P.O. box — just like many
real super PACs. Its website never got up and running, and reception must have been
cool: On Tuesday, it terminated itself. The Restore Trust PAC, started by the same
person, had similar issues.
Also in December, Americans for a Better Tomorrow, Today — clearly a play on
Colbert’s super PAC, Americans for a Better Tomorrow, Tomorrow —
registered with the FEC. On Dec. 12, it announced it wanted to be a super PAC,
with a typo: “Americans for a Better Tomorrow, Toady.”
Todd Bailey, who formed the super PAC, said it’s working for the Occupy Wall Street
movement, which has decried the Citizens Unitedruling and the effect of money on
politics. In other words, a joke on a satire is operating in earnest, apparently under the
theory, “if you can’t beat 'em, join 'em.”
“There’s a tool that’s been created that everyone’s using,” Bailey said. “You have to
make a choice. Either stand on sidelines, or get in the game and use a tool that you’re
really not comfortable with.”
Categories: Media, Politics
prwatch: "issue is so serious & decision so disastrous we don't have an
adequate alternative" but to amend http://t.co/E8vfFzgI #j21
PR Watch on Twitter - January 20, 2012 - 12:53pm
prwatch: "issue is so serious & decision so disastrous we don't have an adequate
alternative" but to amend http://t.co/E8vfFzgI #j21 #occupythecourts
In South Carolina, Another Hospital/Journo Alliance
CJR Daily - January 20, 2012 - 11:50am
Gary Schwitzer at Health News Review raised a question about journalistic ethics the
other day when he took a whack at former newspaperman Ken Burger for returning to
his old employer, Charleston, South Carolina’s The Post and Courier, to write a new
column---this time sponsored by the Roper St. Francis Healthcare system. He will write
about health care,...
prwatch: RT @prwatch_brendan: 2 yrs of #CitizensUnited shows amending the
Const is essential http://t.co/rfecjaij #j21 #ows #occupythecourts
PR Watch on Twitter - January 20, 2012 - 10:47am
prwatch: RT @prwatch_brendan: 2 yrs of #CitizensUnited shows amending the Const is
essential http://t.co/rfecjaij #j21 #ows #occupythecourts
A Day in the Life of South Carolina's 'Sic Willie'
CJR Daily - January 20, 2012 - 6:00am
SOUTH CAROLINA — On most days, you will find Will Folks, aka “Sic Willie”—South
Carolina’s blogger provacateur, the prolific force behind FITSNews.com and that Nikki
Haley story—where you’d least expect him: in a nice home on a quiet, well-kept street
in Columbia, the state capital. He works out of a...
Notes From our Online Readers
CJR Daily - January 20, 2012 - 6:00am
In early November, CJR’s Erika Fry contacted the Poynter Institute with questions about
new aggregation practices at its popular Romenesko+ blog. The result: Jim Romenesko’s
resignation, widespread online outrage, and reams of commentary on aggregation
standards in the link-and-summarize era. “The Romenesko Saga” was Fry’s blow-by-
blow account of the bizarre affair: A fine piece that raises some...
Audit Notes: News Corp. Coverup, GOP and the Unemployed, SOPA
CJR Daily - January 19, 2012 - 9:24pm
Murdoch's hacking scandal flared up again today, as News Corporation paid out millions
of pounds worth of settlements to victims of News of the World crimes, which now
include computer hacking. A high court judge said the Murdoch-owned company
behind the News of the World had made "an admission of sorts" that it engaged in a
deliberate cover-up of...
Barbour Says Pardoned Murderers Deserved ‘a Second Chance’
Pro Publica - January 19, 2012 - 2:46pm
by Dafna Linzer
In an interview and opinion piece in the Washington Post, former Mississippi Gov. Haley
Barbour said this week he was confident that a group of convicted killers, rapists and
other criminals had been successfully rehabilitated in state prison and did not pose a
risk to the public.
"They deserve a second chance, and I'm the only one who can give it to them," Barbour
said on CBS This Morning.
Barbour ordered the releases of 26 prisoners, including men who had been convicted of
murder, just as he was leaving office. Barbour had come to know some of the men
through a state program that allows select prisoners to work odd jobs around the
Most of the men who worked at the mansion Barbour wrote, "have been murderers,
convicted of crimes of passion. Experts agree that these inmates are the least likely to
commit another crime and the most likely to serve out their sentences well."
"My state spends about $350 million on corrections every year, much of it for
rehabilitation, and a lot of guys, a lot of guys aren't ever going to be
rehabilitated," Barbour said in the Wednesday interview with CBS's This
Morning. But those he released "have been. They've redeemed themselves."
Barbour was criticized early in his governorship for a lack of pardons and then faced
new criticism when he began pardoning murderers who worked at the mansion. In the
Post, Barbour wrote that his predecessors had also pardoned such convicts. By the time
he left office, Barbour had issued more than 200 acts of clemency, more than any
But this last round of pardons raised the ire of Mississippi Attorney General Jim Hood,
who claimed Barbour may have violated the state's constitution. A state judge,
responding to the attorney general's concerns, temporarily blocked the release of 21 of
the prisoners. Hood is now seeking to invalidate the pardons of at least 10 people
Barbour ordered released.
Not all governors have the power to pardon. But at the federal level, the power belongs
to the president alone. ProPublica's recent examination of pardon decisions by
President George W. Bush found that white applicants were nearly four times as likely
to receive pardons than minorities. Other factors, such as financial stability,
employment, marital status and the support of a member of Congress, also increased
the likelihood of receiving a pardon.
The president's power to pardon is enshrined in the Constitution. It is an act of
forgiveness for a federal crime. It does not wipe away the conviction, but it does restore
a person's full rights to vote, possess firearms and serve on federal juries.
Presidents are rarely faced with the possibility of pardoning violent criminals. Most
applicants convicted of federal crimes served sentences for financial or drug-related
offenses. Hundreds of ex-felons apply for presidential pardons each year but few are
granted. President Obama has pardoned 22 people, none of whom committed violent
crimes. Obama has also denied hundreds of requests.
But Barbour wrote that the murderers who were pardoned "have paid the price for
their crimes, having served an average of 20 years' imprisonment." The power to
pardon in Mississippi, he wrote, "is based on our Christian belief in repentance,
forgiveness and redemption -- a second chance for those who are rehabilitated and
who redeem themselves."
Categories: Media, Politics
Does Big Pharma Pay Your Doctor?
CJR Daily - January 19, 2012 - 2:30pm
How useful would a database cataloguing the money that doctors receive from medical
drug and device makers—for speaking, research, meals, travel, etc.—be to journalists
trying to ferret out potential conflicts of interest? Just ask ProPublica, which launched
its Dollars for Docs database in October 2010. It was the first, freely available resource
of its kind, based...
prwatch: #RawMilk Battles in Wisconsin, Washington State and Washington,
D.C. Get this week's news from CMD's @FoodRightsNtwrk:
PR Watch on Twitter - January 19, 2012 - 2:02pm
prwatch: #RawMilk Battles in Wisconsin, Washington State and Washington, D.C. Get
this week's news from CMD's @FoodRightsNtwrk: http://t.co/XJUMDXbc
Looking for Lessons in the Swift Boat Saga
CJR Daily - January 19, 2012 - 1:57pm
OHIO — In 2004, it was the Swift Boat ads. Today in Ohio, we’ve seen the Swift Beard
ads. During the 2004 presidential campaign, Ohio was one of five battleground states
targeted for millions of dollars in negative television advertisements produced by a
group known as the Swift Boat Veterans for Truth. The ads accused Democratic
nominee John Kerry,...
On Debt, Mitt's of Two Minds
CJR Daily - January 19, 2012 - 12:08pm
Jesse Eisinger has a smart New York Times column on how Mitt Romney, fittingly
perhaps, is running on debt while running against it. The GOP frontrunner is a former
private-equity CEO, of course, which means his business success, the basis of much of
his campaign, is owed, so to speak, almost entirely to borrowing scads of money. At
prwatch: #ALEC hearts #CitizensUnited http://t.co/WU4UHE2F #j21
PR Watch on Twitter - January 19, 2012 - 11:09am
prwatch: #ALEC hearts #CitizensUnited http://t.co/WU4UHE2F #j21
Deutsche Analyst Sounded Alarm When Asked to Alter Numbers
Pro Publica - January 19, 2012 - 9:04am
by Carrick Mollenkamp, Special to ProPublica
At a time when mortgage-backed securities were imploding and customers were fleeing
the market, a junior analyst at Deutsche Bank AG protested when he was asked to alter
the numbers in a spreadsheet to make a Deutsche security look less risky to ratings
agencies, according to a person with knowledge of the matter.
The analyst, this person said, was asked by a mid-level Deutsche executive in late 2007
to make it appear that the investment would produce more cash than the bank actually
expected at certain time points.
The request came at a crucial moment. In the last months of 2007, investors had grown
skittish about such investments amid signs that the housing bubble was deflating, if not
bursting. Up and down Wall Street, banks were trying to persuade ratings agencies that
large portions of their mortgage-backed securities merited the coveted AAA stamp,
meaning that they posed negligible risks of default. The analyst was asked to alter the
spreadsheets in order to get a better rating, the person said.
The analyst's protest prompted an internal investigation conducted by a law firm,
according to five current and former Deutsche employees. The protest and probe have
not been previously reported.
Much remains unclear about this incident. It could not be learned whether false
information was actually provided to the ratings agencies, nor whether the internal
investigation dismissed or substantiated the analyst's account.
Two Deutsche employees who worked on the same team as the analyst told ProPublica
they knew of no wrongdoing, and Deutsche issued a strong denial. "Any suggestion that
we misled ratings agencies is unfounded and categorically false," said a Deutsche
spokesman, who declined to answer specific questions about the analyst's protest or
the internal inquiry.
But four years later, the revelation that an analyst protested raises questions about
how vigorously, if at all, the government is investigating Deutsche Bank and its practices
leading up to the financial crisis. In any case, ProPublica has learned, neither the S.E.C.
nor any other government regulator or law-enforcement agency has interviewed the
The SEC's director of enforcement is Robert Khuzami. Before joining the SEC in 2009, he
had been Deutsche Bank's general counsel for the Americas since 2004. He worked as
one of the bank's top lawyers during the time the analyst raised questions. Khuzami has
said he would recuse himself from any actions regarding Deutsche.
Another key SEC official -- George Canellos, who oversees enforcement for the
New York regional office -- used to be a corporate lawyer who defended
Deutsche against M&T Bank Corp. M&T, which was suing Deutsche over a
security similar to the one the analyst raised objections to, had sought to
depose the analyst and obtain the results of Deutsche's internal inquiry,
according to people familiar with the lawsuit.
In December, M&T settled with Deutsche for $55 million in cash, M&T said
Tuesday in its fourth-quarter earnings statement.
An SEC spokesman said the agency doesn't discuss whether it is investigating a firm. In
general, spokesman Kevin Callahan said, Khuzami doesn't work on matters related to
Deutsche, and Canellos is recused with respect to any matters related to Deutsche
Bank's CDO business.
"We have policies and procedures for all staff to even prevent even the appearance of a
possible conflict of interest," Callahan said. "We have experienced and professional staff
... to follow the evidence no matter where it leads, how complicated the product or
which firms are involved."
The analyst's protest sheds light on a little-understood function, called modeling, that
was critical to many of the transactions that wreaked major damage during the financial
crisis. Modelers created vast and intricate spreadsheets that estimated or "modeled"
how the securities were likely to perform, including on payment schedules.
Through 2006 and into 2007, a part of Deutsche Bank known as the CDO Group was
humming. CDOs, or collateralized debt obligations, were securities, underpinned by
mortgages, that the bank sold to investors. Even as it hawked these CDOs, Deutsche
Bank and some clients were often betting that they would fail, because the mortgages
that backed them looked increasingly likely to default. In essence, the bank was selling
to investors a product that the bank itself believed was composed of "crap," as one
Deutsche executive famously put it.
During 2006 and '07 -- when CDO sales peaked -- Deutsche ranked fourth in
issuing CDOs behind Citigroup Inc., J.P. Morgan Chase & Co. and Merrill Lynch
& Co., according to a 2011 report on the financial crisis issued by the U.S.
Senate Permanent Subcommittee on Investigations.
Inside Deutsche's CDO Group, pressure to complete and sell the deals was intense,
according to the Senate investigation, court records and people familiar with the
Deutsche team. Investors were beginning to balk at purchasing CDOs because of signs
the housing market was weakening. Employees often worked until 1 a.m. before being
driven home in company-supplied town cars.
Among the hardest workers was a team of financial modelers and analysts. But despite
their long hours, they "needed more bodies to process the work that was coming
through," said a person familiar with the situation. So, some of the work was farmed
out to a relatively cheap but highly skilled source of labor: Deutsche's Global Markets
Centre in Mumbai, India. There, workers proficient in mathematics helped assemble
and input the data for key spreadsheets.
Workers in Mumbai eagerly wanted to join Deutsche's prestigious and lucrative desks in
London or New York. Few got the chance. One employee who did was Ajit Jain.
Jain had studied at the Indian Institute of Technology in New Delhi and joined Deutsche
in June 2006, according to employment records kept by the Financial Industry
Regulatory Authority. He joined the New York office in September 2007, when the CDO
Group was struggling to find investors.
Within a short time of his arrival, according to three people familiar with the matter,
Jain raised questions about whether spreadsheets were being improperly altered. His
complaints went to senior levels within Deutsche, including its legal and compliance
departments, according to people familiar with the matter.
A Deutsche spokesman said Jain wasn't available for comment.
Those spreadsheets were often so large and complex they could take several minutes to
open on a computer, according to a person familiar with them. The spreadsheets
involved fiendishly complex arrays of inputs and sophisticated calculations, involving
everything from the default rates of the mortgages that backed the CDO, to when
borrowers would pay off their loans. But one purpose of the spreadsheets was simple:
to estimate how much cash the CDOs would generate at certain time points.
One place those estimates went was to ratings agencies such as Moody's and Standard
The Quest for a AAA Rating
A CDO is divided into different slices, called tranches, depending on the risk and
potential return. These tranches were rated by one of the ratings agencies. For a CDO to
be sold, it was crucial that the largest tranche be rated AAA, indicating that this
investment was low-risk because it was the last layer to take losses.
But there was a catch: The ratings agencies relied heavily on the banks themselves to
estimate the payment schedule on the underlying assets of the CDO, according to a
person familiar with the work done at the ratings agencies. It was an "honors" system,
this person said, in which the ratings agencies "outsourced" to the banks the inputs for
Those spreadsheets are the essence of what are known as CDO models, because the
spreadsheets provide a model of how the CDO is likely to perform.
Meanwhile, banks knew how to engineer the key elements of a CDO spreadsheet so
that it would spit out cash flow and other outcomes that would meet the ratings
agencies' off-the-shelf formulas, according to a former ratings analyst and a former CDO
manager who worked with Deutsche. In other words, banks structuring the deals knew
what outcomes were necessary to receive a AAA or AA rating, and they knew how to
adjust the spreadsheets to produce these outcomes, these people said.
That's the same conclusion that John Griffin came to. A professor of finance at the
University of Texas at Austin, he co-authored a 2011 paper on CDO modeling that said
banks pushed increasingly for top-tier AAA ratings, and that ratings agencies
succumbed to the pressure. This led to a "downward movement in standards over
time," Griffin said in an interview.
"Cash flow modeling is more susceptible to influence from the investment bank," the
Griffin and his co-author, Dragon Yongjun Tang of the University of Hong Kong, wrote
that former employees at two investment banks told them that banks had learned how
to tailor CDO models to obtain good ratings.
That is very similar to what Jain told his bosses was happening at Deutsche. According
to the person familiar with the matter, a mid-level Deutsche executive asked Jain to
alter the spreadsheets by changing certain payment schedules to win a higher rating.
It is not known whether Deutsche submitted such modified spreadsheets to a ratings
agency to receive better ratings. As best as could be determined, the specific CDO Jain
complained about was not sold to investors. It is not known why.
The Internal Investigation
According to people with knowledge of the internal probe, the alarm Jain sounded went
to senior levels inside the bank, including Deutsche's compliance and legal
Soon, Deutsche called in the New York law firm Milbank, Tweed, Hadley & McCloy to
conduct an investigation. The law firm interviewed employees on the CDO desk,
according to people familiar with the situation.
Two employees on the desk, in interviews with ProPublica, said they knew of no
improper modeling, and a third said he didn't know because he wasn't part of the
"I personally don't think there is anything interesting," said Konstantin Kulev, who
worked as a modeler on the CDO team, according to people familiar with the situation
and internal Deutsche documents. In an interview with ProPublica, Kulev declined to
answer specific questions.
Milen Shikov, another senior modeler, said in an interview that he knew Jain "did raise
some questions" about the CDOs. But Shikov said the matter was "resolved."
Shikov recalled that he was interviewed by a law firm -- he could not remember the
firm's name -- for three hours. He said he gave the law firm's questioners an email
exchange with a ratings agency that he said showed Deutsche had followed the ratings
agency's guidelines for preparing cash flow estimates.
A Milbank, Tweed spokeswoman declined comment. A Deutsche spokesman declined to
discuss the inquiry or release the law firm's findings, but he categorically denied the
bank had misled any ratings agency.
Lawsuits and a Senate Investigation
It is not known whether the SEC is investigating Deutsche. The SEC has settled with
other large banks, such as Citigroup Inc. and JP Morgan Chase & Co. Critics of the
agency say its settlements have been too small and have allowed the banks to neither
admit nor deny wrongdoing.
Last month, M&T settled its civil suit against Deutsche, ending the high-profile case that
had been wending its way through a New York state court.
M&T had alleged that Deutsche improperly sold slices of a $1.1 billion CDO called
Gemstone VII that lost more than 95 percent of their value within months. M&T,
according to its complaint, bought two layers of Gemstone VII: a $42 million layer rated
AAA and a $40 million layer rated AA. "The AAA ratings and AA ratings were major
considerations in M&T's determination to invest in the Gemstone VII notes, because
they indicated that the notes were safe, stable and nearly risk-free investments," M&T
The complaint does not mention how payment schedules were modeled. But M&T
contended that Deutsche and the outside Gemstone VII manager "gave false
information to Standard & Poor's and Moody's, the two leading credit ratings agencies,
to induce them to rate the Gemstone VII CDO notes higher than the notes deserved so
as to overstate their quality and safety."
Jain's objections did not concern Gemstone VII but a later, similar CDO, according to
people familiar with the matter. As part of its investigation for the suit, M&T learned of
Jain's protest and the internal Deutsche inquiry, according to the person familiar with
the suit, and sought to depose Jain and obtain the inquiry report.
Judge John Michalek sealed the case in April, and now M&T has settled. So the suit has
revealed very little new information about Deutsche's practices.
Deutsche declined to discuss the lawsuit. In court papers, Deutsche and its law firm,
Milbank, Tweed, said M&T knew the risks of investing in securities underpinned by
subprime loans. A Deutsche court filing in 2008 called M&T a "sophisticated participant"
in mortgage securities and that the bank had "received detailed written disclosures
about the risks of the investment." The document added that M&T "was counseled to
perform its own due diligence" and was told "it could not rely" on Deutsche.
At least one lawsuit concerning Deutsche's CDOs is continuing. An affiliate of Germany's
IKB Deutsche Industriebank AG sued Deutsche in October after the affiliate lost money
investing in five Deutsche CDOs, according to court documents from that case. The IKB
affiliate alleges that by late 2005, "Deutsche knew that the subprime market had
increasingly come to resemble a house of cards teetering on the verge of collapse." The
court filings do not mention the modeling Jain raised questions about.
A Deutsche spokesman declined comment. One of the most detailed public
accounts of Deutsche's CDO business is the 646-page, 2011 report produced by
the Senate investigation. But the report does not discuss how payment
schedules for Deutsche CDOs were modeled, or the internal inquiry that
stemmed from Jain's alarm.
The Senate report discusses Greg Lippmann, a Deutsche risk manager who
oversaw the assets in Gemstone VII and other CDOs, and helped Deutsche earn
$200 million by betting against some of the bank's mortgage-backed securities.
Lippmann called assets that went into the CDO a "pig" and "crap," according to
the Senate report.
Deutsche's views "were fully communicated to the market through research reports,
industry events, trading desk commentary and press coverage," a bank spokeswoman
said. "Despite the bearish views held by some, Deutsche Bank was long the housing
market and endured significant losses."
Within a few months after Jain raised the alarm, many on Deutsche's CDO team had left
the bank, according to FINRA records, and now work for boutique firms that specialize
in buying distressed mortgage bonds -- exactly the kind of bonds that destroyed the
CDOs they once created at Deutsche.
Jain remains at Deutsche.
Categories: Media, Politics
Time for a robust register of lobbyists
SpinWatch - January 19, 2012 - 8:07am
The government is expected to announce its plans for a statutory register of
lobbyists tomorrow (Friday 20 January). Ahead of publication of its
consultation, Tamasin Cave of the Alliance for Lobbying Transparency said:
"The devil will be in the detail. We need a robust, compulsory register to reveal: who is
lobbying whom, what they are lobbying about, and how much is being spent trying to
influence our politicians. And it needs to be overseen by a body independent of the
Anything less and we can assume that the government is putting the interests of its
friends in the influence industry above public demands for full transparency.
David Cameron has voiced deep concerns about lobbying in the UK getting 'out of
control'. The government must now tackle this £2billion industry and bring their
activities into the open. Britain needs to catch up with other countries and allow real
public scrutiny of lobbying with a robust register of lobbyists. Only then will we be able
to fully understand the impact they have on the way this country is run."
The Alliance for Lobbying Transparency is calling for a robust statutory register, which
would require lobbyists – whether companies or trade unions, lobbying agencies or law
firms, and larger charities (above a minimum financial threshold) – to regularly declare
on a public register:
Names of individual lobbyists;
The special interest lobbying (either the employer or agency clients);
Public body being lobbied;
Information on any public office held by lobbyists within 5 years (to reveal the
Area of policy they seek to influence, whether legislation, regulation or
Amount of money spent on lobbying (good faith estimate). This will reveal scale,
disparities and trends in lobbying.
Categories: Public relations industry
On Bain Claims, Will Local Press Rise to the Challenge?
CJR Daily - January 19, 2012 - 6:00am
COLORADO — When a big national story breaks, job one for a city or metro editor is to
make it relevant and accessible to local readers. And one thing every cub editor learns is
the bag of tricks that can uncover the local angle: talking to a suburban mom affected
by the event, consulting an expert at a local college...
CJR Daily - January 19, 2012 - 6:00am
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