We noted earlier today that Madoff whistleblower Harry Markopolos over the weekend cancelled his scheduled testimony before a House committee, citing illness. Markopolos had been one of the key witnesses scheduled to appear, so his eleventh-hour withdrawal raised a few eyebrows.

We've now spoken to Markopolos' lawyer, Phil Michael, who assured TPMmuckraker that his client was incapacitated and unable to leave his home, and that Markopolos still intends to find a time to testify in the near future.

We look forward to hearing from him.

Did Madoff violate bail?

The Associated Press reports:

Prosecutors on Monday said disgraced financier Bernard Madoff violated bail conditions by mailing about $1 million worth of jewelry and other assets to relatives and should be jailed without bail.

"The defendant's recent actions amount to obstruction of justice," Assistant U.S. Attorney Marc Litt told a judge at a hearing in federal court in Manhattan.

Madoff's lawyer, Ira Sorkin, described the items as heirlooms that included cufflinks and antique watches. He said they were not significant assets. The items were sent to Madoff's children and to unidentified friends vacationing in Florida.

The prosecutor said the case against Madoff "is strong and getting stronger."

SEC Inspector General David Kotz, who is conducting an investigation into the agency's failure to detect Bernard Madoff's alleged "$50 billion ponzi scheme" despite conducting several probes of Madoff's business over the last decade, testified before Congress today.

And from the sound of his opening statement, his inquiry could be worth paying attention to.

Here, paraphrased, are a few highlights from the statement:

- Kotz has asked SEC employees to preserve relevant documents.

- He has sought information from the office of SEC chair Chris Cox, and with senior officials from the agency's compliance section, whose performance is at the heart of concerns that the SEC fell down on the job.

- He has obtained emails sent by former and current employees, both those at the Washington DC headquarters and in the New York and Boston regional offices.

- He hopes to add four new investigators to his team, and is seeking additional office space and administrative help.

- He has scheduled an on-the-record interview with Harry Markopoulos for later this month. Markopolos, who first rasied concern about Madoff's business in a lengthy complaint to the SEC, was scheduled to testify before Congress today but cancelled, citing illness.

- He'll probe conflicts of interest at SEC stemming from Madoff's and his family's relationships with SEC officials.

- He'll also look at the overall operations of the enforcement division.

- And his probe will be "independent and as hard-hitting as necessary."

More news from today's hearing to follow...

It's too soon to say where the federal investigation into CDR Financial Products -- which led to Bill Richardson's withdrawal this weekend as Barack Obama's nominee for Commerce Secretary -- might be heading.

The probe is focused on how the company -- whose founder gave at least $100,000 in political contributions to the New Mexico governor's political action committees -- won two 2004 financial consulting contracts with the state, worth about $1.4 million. No real evidence has yet emerged that Richardson himself is currently a target of the investigation, but his abrupt decision to take himself out of the running for the Commerce post -- and his refusal to say, at a press conference this afternoon, whether he had hired a lawyer in connection with the investigation -- suggest the story won't soon go away.

So it's worth noting that CDR and its founder David Rubin don't exactly have a squeaky clean record.

Even the firm's name isn't what it seems. A 2006 Bloomberg report notes:

David Rubin, whose firm, CDR Financial Products, is entangled in investigations by the Internal Revenue Service, used to call his company Chambers, Dunhill, Rubin & Co. He says he picked those names because he liked the sound of them together. Chambers and Dunhill didn't exist.

More seriously, that same story reported:

CDR, which has advised local governments on more than $17 billion of derivatives since 2003, is being investigated by the IRS for possibly profiting from deals at the expense of U.S. taxpayers. According to IRS letters obtained from the cities of Atlanta and Fargo, North Dakota, and an internal memo from the state of Wisconsin, CDR may have colluded with Bank of America Corp., Bear Stearns Cos. and other companies to make improper fees by selling municipalities unneeded contracts or mispricing investment deals.

The company's offices were searched as part of that investigation, which is ongoing, Bloomberg reports today. The probe is looking at whether banks and advisers conspired to overcharge local governments on financing deals.

The firm was also a player in a federal corruption probe focused on the administration of then-Philadelphia mayor John Street.

Bloomberg provides the details:

In April 2001, CDR hired Ron White, a bond lawyer and chief fundraiser for Philadelphia Mayor John Street, as a consultant, paying him a $5,000 retainer to help the company win business with the city. Rubin donated $15,000 to Street between December 2000 and June 2003, according to Pennsylvania state filings.

In addition, CDR gave White three tickets to the 2003 Super Bowl in San Diego and provided a limo ride to the game. White brought along Philadelphia treasurer Corey Kemp, according to a federal criminal indictment brought against White and Kemp in 2004.

On Feb. 11, 16 days after the game, Kemp told White that city Finance Director Janice Davis agreed to "move fast forward" on a $150,000 swap advisory contract for CDR, according to transcripts of FBI wiretaps.

Banks paid CDR, which wasn't accused of wrongdoing, at least $515,000 from profits they earned on transactions with the city, documents show.

CDR won its contract with the city without a competitive bidding process.

None of this, of course, means that either CDR or Richardson are guilty of any wrong-doing here. But at a minimum, we don't figure to have heard the last of this...

When the House committee that will hold hearings today on Bernard Madoff and the role of the SEC announced its witness list, one of the most interesting names was that of Harry Markopolos. The former rival investor to Bernard Madoff, who had first argued in a complaint to the SEC that Madoff's business was not on the level, was the closest thing this scandal has had to a heroic whistleblower.

But now Markopolos has pulled out, citing illness. Given the low public profile he has maintained since his role in the scandal became public, that move raised our interest.

A spokesperson for Rep. Paul Kanjorski, who chairs the sub-committee holding the hearings, told TPMmuckraker in an email, referring to Markopolos: "He has said that he looks forward to testifying at a subsequent hearing."

So perhaps we'll get to hear from him in the end. But until we do, this will bear watching.

The Wall Street Journal has a deeper look at the various government investigations into Bernard Madoff's business, stretching back over the last 16 years -- all of which failed to detect the alleged "$50 billion ponzi scheme" that Madoff is said to have been running.

Among other nuggets, the Journal reports:

The failure to stop Mr. Madoff also is an embarrassment for Mary Schapiro, the Finra chief who has been nominated by President-elect Barack Obama as the next SEC chairman. Finra [the Financial Industry Regulatory Authority, an industry-run watchdog for brokerage firms] was involved in several investigations of Mr. Madoff's firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way.

Ms. Schapiro declined to comment. Mr. Cox has previously acknowledged mistakes by the SEC. The agency declined to comment.

Close SEC watchers generally have said they expect that under Schapiro, the agency will be a more vigilant watchdog than it has been under President Bush's various chairs, culminating with Chris Cox.

Still, Finra's failure, under Schapiro, to catch Madoff is another reminder that, even though the SEC's problems were in part a result of the pure free-market ideology to which the Bush administration largely subscribed, those problems likely won't immediately be solved by the change of administrations.

The process of rebuilding the Department of Justice after eight years of unprecedented politicization under President Bush continues apace.

President-elect Barack Obama today announced, in a press release, his nominees to fill four key posts under Eric Holder, his pick for Attorney General.

They are:

David Ogden for Deputy Attorney General;
Elena Kagan, Solicitor General;
Tom Perrelli, Associate Attorney General;
Dawn Johnsen, Assistant Attorney General for the Office of Legal Counsel.

Ogden was an assistant Attorney General, and served as chief of staff to Attorney General Janet Reno during the Clinton administration.

Kagan is the Dean of Harvard Law School, and served as Deputy Assistant to the President for Domestic Policy in the Clinton White House.

Perelli was, among other things, managing editor of the Harvard Law Review under Obama's editorship.

In the release, Obama made reference once again to the department's troubles under Bush, declaring:

I have the fullest confidence that they will ensure that the Department of Justice once again fulfills its highest purpose: to uphold the Constitution and protect the American people.

Full bios for all four after the jump...

Read more »

Sen. Hillary Clinton (D-NY) helped a New York developer with legislation not long before he donated to her husband's foundation, the New York Times reports. Robert Congel's donation of $100,000 to Bill Clinton's foundation came after Mrs. Clinton secured earmarks for $5 million worth of road construction serving one of Congel's projects and an allowance to use tax-free bonds for the financing of this project. (New York Times)

Sen. Majority Leader Harry Reid (D-NV) attempted to influence embattled Gov. Rod Blagojevich (D-IL) choice of Senate appointee soon before charges against Blagojevich became public. Reid tried to convince Blagojevich to not appoint Reps. Jesse Jackson Jr. and Danny Davis, as well as Emil Jones, president of the state senate - all of whom are black. Chicago Sun-Times sources say Sen. Reid found them to be insufficiently electable. (LA Times)

Senate Democrats plan to use Senate procedural rules to relegate Roland Burris, Illinois governor Rod Blagojevich's Senate choice, to the status of Senator-elect. By asking for a review of his credentials, Senate Democrats will show that Burris does not have the signature of Illinois Secretary of State Jesse White, thus barring him from being granted voting and speaking privileges. (Associated Press)

Read more »

Was Madoff just the tip of the iceberg?

The SEC is investigating at least one case in which investors may have been cheated out of as much as $1 billion, by money managers using tactics similar to those alleged to have been employed by Madoff, Bloomberg reports, based on anonymous sources "with knowledge of the inquiries."

It adds:

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators had tried as recently as last month to bring in more investors.

And it throws in an additional nugget of news stemming from Madoff's providing a list of his assets to the SEC on Wednesday:

A catalog of Madoff's assets provided by his attorneys to the SEC on Dec. 31 hasn't revealed any major sources of additional cash, a person familiar with the matter said.

The New York Times has gone through President Bush's latest round of pardons and commutations, issued on December 23rd, and found some interesting new nuggets.

We already knew about the case of Isaac Toussie, the New York real estate crook whose pardon was revoked after it emerged that his father was a major Bush donor.

But the Times adds to that the story of Reed Prior, an Iowan serving a life sentence for a drug conviction.

Prior's previous applications for clemency, including one filed as recently as December 2007, were rejected. But this year, Prior's lawyer asked Iowa governor Chet Culver (whose wife he happened to know) to call White House counsel Fred Fielding and schedule a meeting about the application. Culver did so. After meeting with Prior's lawyer, Fielding recommended granting the application, which President Bush then did.

And here's another case of what looks like special treatment:

Alan S. Maiss, once president of Bally Gaming Inc., was convicted in 1995 in a case related to a video-poker scandal in Louisiana. In seeking a pardon, Mr. Maiss was represented by H. Christopher Bartolomucci, an associate White House counsel from 2001 to 2003.

Mr. Maiss applied on Dec. 26, 2007, far later than most of the other pardon recipients. A Justice Department spokeswoman, Laura Sweeney, said Mr. Maiss did not get through quickly because of special treatment. Ms. Sweeney noted that two others who were granted pardons in December had applied recently -- in August 2007 and February 2008.

But Douglas A. Berman, a criminal law professor at Ohio State University, and a clemency consultant, said "there's no doubt" that Mr. Maiss had received fast-track treatment.

Mr. Bartolomucci, who has several other clemency clients, said he visited the White House in August 2008, "hand-delivered the materials that had already gone to the Justice Department," and "took a few minutes" to talk with the associate counsel who handles pardons, Kenneth Lee, about Mr. Maiss's case.

"His application was granted because of its considerable merits," Mr. Bartolomucci said.

Leaving aside the merits or lack thereof of these particular cases, the larger problem here is the simple fact that these backdoor routes aren't open to the great majority of people.

Karen Orehowsky, described as a volunteer clemency consultant who advised Mr. Prior's commutation team, tells the Times:

It takes a 'Hail Mary' from people who have a lot of connections and who are willing to put their neck out for people they care about, and it's unfair to people who don't have those connections.

Seems about right.

So, how much are the four firms hired to manage the Fed's mortgage-backed securities purchase program getting paid for their work, and how did they get the contracts in the first place?

They're not saying.

We called Blackrock Inc., Goldman Sachs, Wellington Management, and PIMCO to ask them about their recently announced contracts to manage a total of $500 billion worth of mortgage-backed securities, on behalf of the Federal Reserve. Spokespeople for the first three firms told us they were referring all questions to the Fed. Representatives for PIMCO -- whose founder said in September that his firm would manage a very similar Treasury program for free, out of patriotic duty -- have not responded to two messages.

A spokesman for the New York Fed told TPMmuckraker he'd get back to us with more information.

"The selection of these managers seems incredibly opaque," Jeffrey Gundlach, the chief investment officer for the invesment firm TCW, and an expert in mortgage-backed securities, told TPMmuckraker.

Indeed, the Fed has so far provided little detailed information on the process by which these firms were selected. In a fact sheet posted on their website, the Fed wrote:

Because of the size and complexity of the agency MBS program, a competitive request for proposal (RFP) process was employed to select four investment managers and a custodian ... The selection criteria were based on the institution's operational capacity, size, overall experience in the MBS market and a competitive fee structure.

We'll keep you posted on what we learn from the Fed...

Attorney General Michael Mukasey released a legal opinion saying that interviews between Vice President Dick Cheney and the FBI regarding the Valerie Plame affair will remain confidential. Mukasey cited a concern that releasing the interviews would discourage White House officials from participating in future interviews. Cheney reportedly asked his deputy, Lewis Libby, to reveal Plame's name to a reporter. (Legal Times)

Roland Burris, Governor Rod Blagojevich's pick to replace President-elect Obama in the Senate, once sought the death penalty for a man wrongly accused of murder. As Illinois Attorney General in 1992, Burris continued the prosecution of a man charged with rape and murder despite a confession from another man and the objections of his top prosecutors. (ProPublica)

A response from the Treasury Department to questions posed in a COP report last month acknowledges that it is hard to estimate the specific impact of TARP funds, but that they are helping ease credit markets. The response notes that credit default swaps between banks have gone down 240 basis points and that much bailout money has yet to make it into the financial system. (Portfolio)

Read more »

The Hill reports today:

Despite keeping Defense Secretary Robert Gates in the Pentagon, President-elect Obama's transition team informed 90 Bush appointees their services will not be needed after Inauguration Day.

It's worth pointing out that another roughly 160 political appointees were kept on. But here at TPMmuckraker, we were more interested in what came next.

The paper reported that, in response to the Obama team's move, Jim O'Beirne, the special assistant to the secretary of defense for White House liaisons, sent an email to the dismissed DOD staffers, in which he suggested that they were being removed by political opponents as a result of their effectiveness in carrying out Bush administration policies.

Reports The Hill:

In the email, O'Beirne tried to assure the soon-to-be displaced employees that the decisions were based on "policy change in the Obama administration" and not based on performance.

However, he said, if employees "harbor residual doubts" then they can "content yourself with the likelihood that it was your outstanding performance as a Bush appointee that drew the opposition's attention to you."

"In that regard, you may take justifiable satisfaction that you were among the first to be chosen," O'Beirne wrote.

Now, this way of thinking -- that being removed by "the opposition" (that is, the man who'll be our president) is a badge of honor, because it shows that you were committed to implementing the policies of the previous president -- is misguided coming from anyone.

But The Hill doesn't note that in the case of O'Beirne, a longtime GOP operative who's married to the conservative commentator Kate O'Beirne, it's perhaps not surprising. Consider this excerpt from a Washington Post story from 2006:

After the fall of Saddam Hussein's government in April 2003, the opportunity to participate in the U.S.-led effort to reconstruct Iraq attracted all manner of Americans -- restless professionals, Arabic-speaking academics, development specialists and war-zone adventurers. But before they could go to Baghdad, they had to get past Jim O'Beirne's office in the Pentagon.

To pass muster with O'Beirne, a political appointee who screens prospective political appointees for Defense Department posts, applicants didn't need to be experts in the Middle East or in post-conflict reconstruction. What seemed most important was loyalty to the Bush administration.

O'Beirne's staff posed blunt questions to some candidates about domestic politics: Did you vote for George W. Bush in 2000? Do you support the way the president is fighting the war on terror? Two people who sought jobs with the U.S. occupation authority said they were even asked their views on Roe v. Wade.

In other words, O'Beirne led the disastrous process in which key posts in the Coalition Provisional Authority were given to Heritage Foundation research assistants who knew nothing about Iraq but were loyal to the GOP. And we all know how that turned out.

So perhaps it's to be expected that O'Beirne would continue to see government only through the prism of politics. Still, it's an outlook that's rarely expressed so crassly.

Thanks to reader W.M. for the tip.

Earlier this month, as we noted at the time, the congressional oversight panel for the financial bailout released a report on how the Treasury is spending the $700 billion in taxpayer money Congress gave them.

In its report, the panel, chaired by Harvard Law professor Elizabeth Warren, asked several basic questions about the Treasury's activities, for which it had not yet been given enough information to provide conclusions. These included "What is Treasury's Strategy?" "Is the Strategy Working?" And "What Have Financial Institutions Done with the Taxpayers' Money?"

Now -- not coincidentally, at a time when most people are distracted by thoughts of cheap champagne and off-key singing -- the Treasury has responded.

The 13-page riposte is, by and large, an impressive example of using up white space while saying absolutely nothing. But a few excerpts stand out as noteworthy.

First of all, in response to Warren's question of whether the strategy is working to stabilize markets, Treasury says, in part:

Treasury is also monitoring the effects our strategy is having on lending, although it is important to note that nearly half the money allocated to the Capital Purchase Program has yet to be received by the banks. Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications. Clearly this capital needs to get into the system before it can have the desired effect. In addition, we are still at a point of low confidence - both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, Treasury expects to see more credit extended. The increased lending that is vital to our economy will not materialize as fast as anyone would like, but it will happen much faster as a result of deploying resources from the TARP to stabilize the system and increase capital in our banks.

In other words, we originally said this whole bailout was necessary to increase lending, and it hasn't. But it still might "as confidence returns." (The fact that the bailout was supposed to be a key part of restoring confidence doesn't seem to have been considered.)

But now look at this: A few pages later, Treasury responds in part to Warren's question of what the banks are doing with the bailout money by essentially cutting and pasting the very same paragraph:

The CPP began in October 2008 and the money must work its way into the system before it can have the desired effect. Moreover, we are still at a point of low confidence - both due to the credit crisis and due to the economic downturn, during which lending and borrowing levels normally drop. While confidence is low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans. As confidence returns, we expect to see more credit extended. This lending won't materialize as fast as anyone would like, but it will happen much faster as a result of having used the TARP to stabilize the system and to increase the capital in our banks.

Look closely at those two blockquoted paragraphs. It genuinely looks like someone has gone through the second one and altered a few phrases -- "as long as confidence remains low" becomes "while confidence is low" -- so that it's not a word for word replica of the first.

This isn't just an issue of shoddy writing, or even lazy thinking. It suggests that Treasury was so stumped by Warren's question of what banks are doing with the bailout money that it resorted to copying passages from earlier in the report -- passages that have little direct relevance to the question -- to pad out its answer and obscure the fact that it has no idea.

It comes closest to answering the question in this passage, in which it essentially throws up its hands and confesses ignorance:

As the GAO noted in its report, given the number and variety of financial stability actions being put in place by multiple entities, it will be challenging to view the impact of the Capital Purchase Program in isolation and at the institutional level. Moreover, each individual financial institution's circumstances are different, making comparisons challenging at best, and it is difficult to track where individual dollars flow through an organization.

And as for why Treasury hasn't insisted on more reforms from participating banks:

The CPP is a voluntary program for viable institutions. The program was designed to be attractive to financial institutions of all sizes as a mechanism to increase capital in the financial system while also protecting the taxpayer.

In other words, banks wouldn't have done it if they'd had to agree to more regulation. And we didn't want to make them.

Warren's panel is still slated to release a second report on the Treasury's handling of the bailout money -- though whether it will decide that Treasury has adequately responded to the issues raised in its first remains to be seen.

Over at TPM, we noted earlier today the news that the Federal Reserve has hired four investment firms -- BlackRock, Goldman Sachs, PIMCO and Wellington Management Company -- to manage its mortgage-backed securities purchase program, in which it will buy up $500 billion worth of mortgage bonds, in an effort to boost the housing market.

It'd be nice to know more about why all of these companies were selected, and how much they're being paid -- and we've put those questions to the Fed. But for a number of reasons, one of the four firms, bond giant PIMCO, stands out as a particularly interesting choice.

As of June 30th, 61 percent of PIMCO's holdings -- $500 billion -- were in the very mortgage backed securities that it's now being hired by the Fed to buy back on behalf of US taxpayers, according to a September Bloomberg report that cited data on PIMCO's own website.

That could explain why, as financial blogger Rolfe Winkler pointed out earlier today, PIMCO chief Bill Gross was sounding the alarm in early September about the disastrous fate that would befall the US economy unless the government started buying up troubled mortgage assets.

In a September 4 post on PIMCO's website, Gross warned:

If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.

Within days, the Treasury had done what Gross was asking. In other words, as Peter Cohan, a professor of management at Babson College, put it at the time in a post on Bloggingstocks.com:

Bill Gross, who manages $830 billion, has convinced the U.S. Treasury to use your taxpayer dollars to bail him out of his bad investments.

And Gross seems to have had his eye on the endgame for a while here too. Later that month, he argued in a Washington Post oped that a broader bailout -- what became the TARP -- was also desperately needed, and he seemed to suggest that his own PIMCO would be a perfect candidate to manage the funds.

He wrote (via nexis):

Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. (itals ours)

PIMCO, or the Pacific Investment Management Company, is based in Newport Beach, California.

In an interview shortly afterwards with CNBC's Erin Burnett, Gross presented his willingness to take on that job as a patriotic stand, pledging that PIMCO would work for no fee, "if everybody else worked on the same basis." (It's around the 4:25 mark).

And now the Fed has given him what's essentially the same job.

Will Gross stand by his pledge to work for free? We've called PIMCO to ask, and will keep you posted on what we found out. But given how Gross has made out so far, we're not holding our breath.