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Treasury’s ‘Point Man’ on AIG Bailout That Benefited Goldman, Owned Goldman Stock

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by Karen Weise

ProPublica, June 30, 4:53 p.m.

Deep in an article today on the government's bailout of AIG, The New York Times cites sources saying that the Treasury Department's "point man" on AIG, Don Jester, was a former Goldman Sachs employee who owned stock in the bank even as he was making decisions [1] on the bailout that ultimately channeled billions of taxpayer dollars to Goldman.

Owning stock in a company an official oversees typically is verboten, but because Jester was working as an outside contractor rather than an official employee, he was exempt from conflict-of interest rules [2].





Goldman Sachs stood to benefit from the AIG bailout because Goldman had roughly $20 billion in insurance-like credit-default swaps with AIG -- essentially bets by the investment bank that the housing market would go south. But if AIG collapsed, Goldman wouldn't be able to collect on the bets. When the government instead bailed out AIG, taxpayers paid out the swaps at full face value, and Goldman Sachs got $12.9 billion [3] -- more than any other of AIG's customers.

Jester was Goldman's deputy CFO when he left the firm in 2005. And here's what the Times says [1] about his investments in Goldman:

Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury's response to the A.I.G. crisis.

We contacted Jester this morning to comment on the story and confirm the stock ownership; we'll post an update when we get a response. His spokesperson, Michelle Davis, told the Times that Jester followed what the paper paraphrases as an "ethics plan to avoid conflict with all of his stock holdings." (According to a federal database search, Jester received $30,000 [4] for six months consulting at the Treasury Department.)

Earlier this year, a Times op-ed online dubbed Jester one of the "mystery men" [5] of the financial crisis and noted that Jester was at the center of the Treasury Department's response to AIG's impending collapse. During the chaotic two months in the fall of 2008, Timothy Geithner, then the head of the Federal Reserve Bank of New York, spoke on the phone with Jester 103 times -- more than other person aside from then-Treasury Secretary Henry Pauslon. Jester relocated to AIG's offices for a period of time, the paper reported.

The government's decision to have AIG pay out Goldman and others bets at full value has been controversial. The Times said while several of the Federal Reserve Bank of New York's outside advisors recommended it force banks to take losses on their bets with AIG, Jester advocated for full repayment:

According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.

As an example of the advice against paying full value for the deals, the Times cited a presentation from an advisor [6] to the New York Fed, which outlined five reasons banks should agree to concessions. The Federal Reserve Bank of New York defended its decisions to the Times:

"This was not about the banks," said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. "This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies."

http://www.nytimes.com/2010/06/30/business/30aig.html?hp=&pagewanted=all

http://www.federalreserve.gov/aboutthefed/section%2010.htm

http://www.nytimes.com/2010/02/07/business/07goldman.html

http://www.usaspending.gov/explore?carryfilters=on&agencyid=2001&fromfis...

http://opinionator.blogs.nytimes.com/2010/02/04/mystery-men-of-the-finan...

http://documents.nytimes.com/aig-bailout-documents#document/p637

June 30, 8:26 p.m.

The expression “stabilizing the system by preventing the disorderly collapse” means that big businesses stay big, and smaller competitors can only grow to a certain size or fail. Government now protects the successful against failure, denying opportunity to those who have not already made it.



Russ Gurley

July 1, 5:50 p.m.

We should be surprised? Who else do you think Paulson would recommend to advise recovery mechanisms for his previous and future employer? We should be a bit more humble when we refer to Karzai as corrupt.



Jon Laird

July 1, 6:15 p.m.

and we’re suprised by what part of this story?



hank

July 2, 1:25 a.m.

Geithner is busy distancing himself from this one



Sally G

July 2, 11:08 a.m.

And this surprises us, why? Just how many GS alumni or employees are involved in our federal Treasury Department, Federal Reserve, etc.? Was it his last name that prevented Mr. J. from getting a permanent position, or was he better off as a short-term consultant who could go back into the industry (perhaps even GS) once everything “blew over”. Too bad it didn’t blow up (i.e., TBTF bank closings) instead.



surprisedvoter

July 4, 10:41 a.m.

in what other scenario would a highly questionable transfer of $ not be the subject of a police investigation?

imagine a small town agency broker involved in using client funds to pay debts incurred by the company he represents? the sec, fbi, etc would be on top of him like a ton of bricks.

but NY fed, GS, govt officials robbing the taxpayer, that’s OK,

and arn’t you sick of hearing, “with hindsight the situation is easy to criticise”. if they are so smart why did they end up delivering such a poor service unless it was a criminal event?



JP

July 5, 11:22 p.m.

On The New York Fed’s Editorial Influence Over The WSJ

Submitted by Tyler Durden on 07/05/2010 19:34 -0600

One of last year’s key pieces of financial reporting was Jon Hilsenrath’s disclosure that then-Goldman Sachs and FRBNY director Stephen Friedman was in possession of Goldman Sachs shares while holding inside information that the Fed was willing to bailout Goldman et al forever and ever, even as a waiver to allow Friedman to buy was still in process with no formal outcome, and the Goldman/FRBNY director was loading up on even more shares. As the WSJ’s Hilsenrath and Kate Kelly reported, “while it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They’ve since risen $1.7 million in value.” Not a shabby profit for someone who knew the system would never put him at risk of having to disgorge ill-obtained profits while in a position so conflicted, even a Chrysler-addled supreme court justice would have no problem figuring out just how blatant the systemic abuse was. Sure enough, the reporting was of sufficiently high caliber that it garnered a finalist place in this year’s Gerald Loeb Awards (and seeing how ARS’ “Too Big To Fail” chronology-of-events-from-the-perspective-of-Wall Street won a Loeb, it tells all you all you need to know about this particular award, and we’ll leave it at that). Yet going through some of the recently made public e-mails produced on behalf of Stephen Friedman, we had a few questions as to the full independence of the WSJ when it comes to “editorial” suggestions from the Federal Reserve Board Of New York. As the below email from Fed EVP of the Communications Group, ala media liaison, Calvin Mitchell to the WSJ’s Kate Kelly demonstrates, and as the final product confirms, the Fed was quite instrumental in what quotes, tangents, implications, and story lines the WSJ was allowed and not allowed to use and pursue in framing the problem of not only Friedman’s conflict of interest, but that of the FRBNY board of directors itself. And seeing how Kelly and Hilsenrath caved in to every FRBNY editorial demand, one wonders just what the (s)quid-pro-quo for this particular form of alleged media capture may have been.

We present FRBNY-TOWNS-R1-191200/1:

more here: http://www.zerohedge.com/article/new-york-feds-editorial-influence-over-wsj

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PRIOR MOST ALL AMERICAN TAXPAYERS EVER KNOWING THAT TARP WAS COMING !!!

TARP = TAKE ALL RESOURCES POLITELY...

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Supreme Court rules for president in separation of powers case

The Supreme Court ruled Monday that a board overseen by the Securities and Exchange Commission operated under rules that violated the Constitution's separation of powers clause.



In 2002, then-Rep. Mike Oxley (R) of Ohio (far left) and then-Sen. Paul Sarbanes (D) of Maryland (2nd left) joined President Bush at the signing of a corporate responsibility act. The Supreme Court Monday ruled that part of that law violated the separation of powers clause of the Constitution.

J. Scott Applewhite/AP/file



By Warren Richey, Staff writer / June 28, 2010

Washington

Congress overstepped its authority when it sought to create an independent watchdog agency deliberately insulated from direct presidential control and political accountability.

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In a 5-to-4 decision announced on Monday, the US Supreme Court struck down a portion of the 2002 Sarbanes-Oxley Act, which authorized the creation of the Public Company Accounting Oversight Board (PCAOB).

In a narrow ruling, the majority justices said the accounting oversight board could continue to function as before, but that its members must face removal at any time by the Securities and Exchange Commission (SEC), which supervises the accounting board.

Under the law as written by Congress, the accounting board members could only be removed for cause – in other words, if they engaged in some form of wrongdoing. Under Monday’s ruling, the members must be able to be removed “at will,” or for any reason including a policy difference.

The action was deemed by the majority justices as necessary to restore enough control over the board by the president to satisfy separation of powers requirements.

“We hold that such multilevel protection from removal is contrary to Article II’s vesting of the executive power in the president,” Chief Justice John Roberts wrote for majority. “The president cannot ‘take care that the laws be faithfully executed’ if he cannot oversee the faithfulness of the officers who execute them.”

At issue in the case

The oversight board was established in the wake of the accounting scandals at Enron and other large corporations. It was designed to encourage aggressive audits of publicly traded companies to help keep corporate officials honest and investors better informed of a firm’s financial health.

To create a watchdog group independent of the accounting industry, Congress required the five members of the oversight board to be appointed by the SEC. In addition, the SEC was to supervise the board’s activities and wield the power to remove any PCAOB board member, but only “for cause.”

At issue in the case, Free Enterprise Fund v. Public Company Accounting Oversight Board, was whether appointment of oversight board members by the SEC rather than the president violated the separation of powers and the Constitution’s appointments clause by insulating the board from presidential control and political accountability.

The high court ruled that it did.

“The Constitution that makes the president accountable to the people for executing the laws also gives him the power to do so. That power includes, as a general matter, the authority to remove those who assist him in carrying out his duties,” the chief justice wrote. “Without such power, the president could not be held fully accountable for discharging his own responsibilities; the buck would stop somewhere else.”

Joining the chief justice in the majority were Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas, and Samuel Alito.

In a dissent, Justice Stephen Breyer said the statute did not significantly interfere with the president’s executive authority. “It violates no separation-of-powers principle. And the court’s contrary holding threatens to disrupt severely the fair and efficient administration of the laws.”

The facts of the case

The case stems from an investigation undertaken by the PCAOB against Nevada accounting firm Beckstead and Watts. An inspection by the accounting board uncovered significant deficiencies in eight of 16 audits reviewed.

Beckstead responded by filing a lawsuit challenging the constitutionality of the board’s authorizing statute – a portion of the Sarbanes-Oxley Act. The non-profit Free Enterprise Fund joined the suit challenging the statute.

A federal judge and a federal appeals court panel upheld the law.

The appeals court ruled that the PCAOB did not violate the Constitution’s appointments clause because they were “inferior officers” within the executive branch whose work is controlled by SEC commissioners, who are appointed by the president.

Likewise, the appeals court said the law did not violate the separation of powers because the SEC exerts control over the board and, in turn, the president exerts control over SEC commissioners.

On Monday, the high court ruled that two levels removed from the president was one level too much. “While we have sustained in certain cases limits on the president’s removal power, the act before us imposes a new type of restriction – two levels of protection from removal for those who nonetheless exercise significant executive power,” Roberts wrote. “Congress cannot limit the president’s authority in this way.”

Reaction to the decision

In a joint statement, the authors of the Sarbanes-Oxley Act – Paul Sarbanes and Michael Oxley – said the high court action would allow accounting board’s essential protections of American investors to continue.

“The decision from the Supreme Court adjusts the law in a way that allows the PCAOB to continue to ensure the integrity of public company audits,” Sarbanes and Oxley said.

“The court’s ruling is a victory for investors and for the accounting profession,” said Barry Melancon, president of the American Institute of Certified Public Accountants.

“The decision effectively fixes the constitutionality of the PCAOB by making board members subject to ‘at will’ removal by the SEC and therefore the president,” he said, adding that it permits the continued function of both the accounting board and the underlying statute.

Cindy Fornelli, executive director of the Center for Audit Quality, said she was pleased that the decision would allow the accounting board to continue to operate without any legislative action.

“Evidence demonstrates that audit quality and investor confidence have improved since the board’s creation,” she said. “The decision will prevent any disruption to the key activities of the PCAOB.”

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