The "Crisis In Accountability" in New York Starts With Andrew Cuomo And His Wall Street Cronies

The New York Post reports the following:

It’s your toxic mortgages at work.

Goldman Sachs investment banker Jeffrey Verschleiser, accused in lawsuits of illicitly profiting from bad mortgages that led to the 2008 meltdown, is spending $1 million to take over a swanky Aspen, Colo., hotel for his Upper East Side daughter’s bat mitzvah, sources said.

Verscheisler is taking over the luxury Hotel Jerome for the entire weekend, and perks for the guests reportedly include autographs from pro skiers.

The Aspen Daily News reports that Verschleiser also rented out the city-owned Aspen Recreational Center, which will close at 4 PM today instead of the usual 9 PM so that the Verschleiser party can take it over.

Gonna be a nice weekend for the Verschleiser family.

And why wouldn't it be?

When you see how much money this crook stole with impunity on Wall Street while the authorities - including then Attorney General Andrew Cuomo - stood by and watched, how could it be otherwise?

So how did Jeffrey Verschleiser get into this position where he could buy up half of Aspen for his daughter's Bat Mitzah?

Matt Taibbi takes up the story from there:

The story begins at Bear Stearns, where Verschleiser used to work, up until the company exploded, in large part because of him personally.

Back in the day, you see, Verschleiser headed Bear’s mortgage-backed securities operations. Toward the end of his tenure, his particular specialty began with what at the time was the usual industry-wide practice, putting together gigantic packages of crappy subprime mortgages and dumping them on unsuspecting clients.

But Verschleiser reportedly went beyond that. According to a lawsuit later filed by a bond insurer called Ambac, Verschleiser also masterminded a kind of double-dipping scheme. What he would do is sell a bunch of toxic mortgages into a trust, which like all mortgage trusts had provisions written into their pooling and servicing agreements (PSAs) that required the original lenders to buy the loans back if they went into default.

So Verschleiser would sell bad mortgages back to the banks at a discount, but instead of passing the money back to the trust, he and other Bear execs allegedly pocketed the funds.

From the Atlantic story by reporter Teri Buhl:

The traders were essentially double-dipping -- getting paid twice on the deal. How was this possible? Once the security was sold, they didn't have a legal claim to get cash back from the bad loans -- that claim belonged to bond investors -- but they did so anyway and kept the money. Thus, Bear was cheating the investors they promised to have sold a safe product out of their cash. According to former Bear Stearns and EMC traders and analysts who spoke with The Atlantic, Nierenberg and Verschleiser were the decision-makers for the double dipping scheme.

Imagine giving someone a hundred bucks to buy a bushel of apples, but making a deal with him that he has to buy back any apples that turn out to have worms in them. That's what happened here: Bear sold the wormy apples back to the farmer, but instead of taking the money from those sales and passing it on to you, they simply kept the money, according to the suit.

In an email one Bear exec called the bonds Bear was hawking "sacks of shit."

Mmm - but that was lucrative shit for Jeffrey Verschleiser, wasn't it?

But it gets worse.

Back to Taibbi:

So did Verschleiser himself know the mortgages were bad? Not only did he know it, he went so far as to tell his colleagues in writing that it was a waste of money to even bother performing due diligence on the bad bonds:

Jeffrey Verschleiser even said in an e-mail that he knew this was an issue. He wrote to his peer Mike Nierenberg in March 2006, "[we] are wasting way too much money on Bad Due Diligence." Yet a year later nothing had changed. In March 2007, Verschleiser wrote to Nierenberg again about the same due diligence firm, "[w]e are just burning money hiring them."

One of the ways that banks like Bear managed to convince investors to buy these bonds was by wrapping them in bond insurance through companies like Ambac, commonly known as “monoline” insurers. Investors who knew the bonds were insured were less worried about default.

Verschleiser, seeing that Bear had gotten firms like Ambac to insure its “sack of shit” bonds, saw here a new opportunity to make money. He first induced the monolines to insure the worthless bonds, then bet against the insurers! (Is it any wonder this guy ended up hired by Goldman, Sachs?) From the Atlantic story again:

Then in November 2007, Verschleiser wrote to his risk committee that he knew insurers for mortgage securities were going to have big financial problems. He suggested they multiply by ten times the short bet he'd just made against stocks like Ambac. These e-mails show Verschleiser's trading desk bragging to firm leadership that he made $55 million off shorting insurers' stock in just three weeks.

So in essence, Verschleiser was triple-dipping. First he was selling worthless “sacks of shit” to investors, representing them as good investments. Then, he kept the money from the return sales of the wormy apples. And then, on top of that, he made money by betting against the insurers he was sticking with these toxic assets

Surely New York Attorney General Andrew Cuomo or the SEC or some other regulatory body stepped in to put handcuffs on this man until he could be tried for fraud?

Nope.

As the NY Times reported April 14, 2011, not one major participant in the financial collapse of 2008 has been criminally prosecuted and sent to jail.

That holds for Jeffrey Verschleiser.

As Taibbi writes,

We all know what happened from there. Bear, Stearns went under, thanks in large part to insane schemes like Verschleiser’s, and all of us were forced to pick up at least part of the tab as the Fed spent billions subsidizing Bear’s emergency takeover by JP Morgan Chase. In subsequent litigation, Chase has steadfastly refused to buy back the bad mortgages dumped on investors by the likes of Verschleiser, and has even fought tooth and nail to prevent the information in the Ambac suit from being made public.

Ambac went into Chapter 11 bankruptcy in 2010 for a variety of reasons, some of which had nothing to do with its losses in deals like these. But certainly Ambac and other monoline insurers like MBIA suffered for having insured worthless mortgage bonds sold onto the market by the Verschleisers of the world. Ambac in its suit asserted that it paid out over $641 million in claims related to the bonds from the Bear deals.

With all of this, though, Verschleiser landed happily on his feet. He reportedly heads Goldman’s mortgage division now. And after cutting a mile-wide swath of losses through the American economy, helping destroy two venerable firms in Bear and Ambac, bilking the taxpayer for untold millions more (he is also named in a lawsuit filed by the Federal Housing Finance Agency for allegedly speeding bad loans onto securitization before they defaulted), Verschleiser is now living the contented life of a proud family man, renting out a 94-room hotel for three days for his daughter’s Bat Mitzvah.

Andrew Cuomo said this week there is a "crisis of accountability" in New York.

He was talking about the school system and was alleging that public school teachers are unaccountable because they refuse to be evaluated by a system that utilizes student test scores and a value-added measurement with a large margin of error and wide swings in findings from year to year.

Pointedly, he was NOT talking about a justice system that allows a Jeffrey Verschleiser to criminally triple-dip his way to a very wealthy and lucrative lifestyle with impunity.

Taibbi writes:

Anyway, given that much of Verschleiser's questionable behavior is in writing, his case sure seems court-ready. But for whatever reason, he has not been indicted.

One can almost understand a regulator not wanting to take on the whole circular securitization scheme -- Bear lends money to corrupt mortgage firm, mortgage firm makes bad loans, Bear packages bad loans and sells to investors, then takes the proceeds and creates more bad loans -- because it is so complex and difficult to prove.

But in this case there are simple issues of fraud and theft that could be taken on without having to prosecute broader crimes related to securitization. But prosecutors, apparently, just blew those off. In the current environment, regulators even miss the layups.

And therein lies the REAL crisis in accountability in New York and the country at large.

Andrew Cuomo himself, along with the other regulators who let these crimes go largely uninvestigated and entirely unpunished, need to be held accountable, as do crooks like Jeffrey Verschleiser.

Michael Bennet Ruined The Finances And Pension Fund Of The Denver School System

I would have led today with this blockbuster story in the NY Times about the Denver school system and how the guy who Whitney Tilson thinks "Rocks!!!" cost it millions, but the jobs numbers and the Obama administration outsourcing policies were more pressing.

But now let's take a look at the Michael Bennet Denver public school scandal:

In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution.

The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs — money that could be plowed back into Denver’s classrooms, starved in recent years for funds.

To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.

Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.

The Denver schools essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments.

The Denver school board unanimously approved the JPMorgan deal and it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed. In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.

Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.

To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.

John MacPherson, a former interim executive director of the Denver Public Schools Retirement System, predicts that the 2008 deal will generate big costs to the school system down the road. “There is no happy ending to this,” Mr. MacPherson said. “Hindsight being 20-20, the pension certificates issuance is something that should never have happened.”

...

Both Mr. Bennet, whom the White House has praised for his innovative approach to education, and Mr. Boasberg defend the deal they recommended in Denver back in 2008. They say that it has saved the school district $20 million it would have otherwise had to pay to cover the pension shortfall, and they maintain that no one could have predicted the credit crisis of 2008 that elevated the deal’s costs.

Really? No one could have predicted the credit crisis of '08 that elevated the deal's cost to ruinous levels?

YOU CLOSED THE DEAL AFTER BEAR STEARNS HAD ALREADY FAILED!!!!

If the failure of Bear Stearns from credit problems wasn't an indication that a credit crisis was occurring, then what exactly would be?

Here is what USA Today said when the Bear Stearns failure occurred in mid-March 2008, weeks before Bennet and Boasberg closed the finance deal for the Denver school system:

If the U.S. economy were a car, all of its warning lights would be flashing red.

The breathtaking collapse of investment bank Bear Stearns over the weekend is the latest — and perhaps the most alarming — indicator to flash on the economy's dashboard.

First, the crisis in subprime mortgages — loans to those with poor credit — infected the credit markets. Then home prices started sinking. Then mortgage defaults rose, and the economy began to sputter. Now, the Federal Reserve is desperately trying to stabilize the credit market before a failure of confidence can poison the entire U.S. financial system.

The latest sign that the financial system is close to overheating: Bear Stearns, (BSC) once the country's fifth-largest investment bank, agreed Sunday to be sold for just $2 a share, down 93% from its closing price Friday.

The best-case scenario now is that the Fed can get the financial markets humming again, leading to a recovery in the housing market and a resurgent economy. The worst case: an economic breakdown in which the crisis spreads to other banks, and beyond.

"It's a really dicey moment we've come to," says Seattle-based money manager William Fleckenstein.

Read the rest of the USA Today article to see that nearly EVERYBODY post-Bear knew their were problems in the system that could lead to a spectacular crash.

Everybody except for Bennet and Boasberg, of course.

Apparently Bennet and Boasberg needed the ghost of Alexander Hamiliton to come up from hell in some Dickensian spectacular and warn them about the dangers of what essentially was an ARM for the Denver public school system as so many other people with ARM's were going belly-up and causing the firms that backed them - like Bear Stearns - to go belly-up too.

And despite costing Denver public schools millions, Bennet continues to insist the deal was good for taxpayers.

Huh?

I think what bothers me most about this story is that it is another example of either an inept or corrupt public official with connections who gets a pass from President Accountability even though he cost the Denver public school system millions.

Bennet should not only be out of politics, he ought to be IN JAIL for the financial decisions he made as head of the Denver school system.

No wonder Bennet has taken in so much campaign cash from hedge funds, securities funds, insurance companies and real estate interests.

He is squarely on their side, stealing money from the Denver schools and quite literally HANDING IT OVER TO THE CROOKS ON WALL STREET.

I guess that's why Whitney Tilson thinks Bennet "Rocks!!!"

He's helped make Tilson and other criminals like Tilson millions.

Instead of turning his back on a creep like Bennet, President Accountability has helped him with his election campaign like he has helped no other candidate running in 2010.

So Obama must really want Bennet around despite what amounts to a major league screw deal that will eventually cost thousands of teachers their pensions and Denver school kids their teachers.

Because that's how they'll fix this problem, of course.

They'll come around in 2014 and say "We can't afford to pay you what we promised you for your pensions anymore..."

And they'll say "This is an emergency, we have to lay off teachers and raise class size to 40..."

And Bennet and Obama, god forbid they are still in power, will nod solemnly and talk about fiscal responsibility and prudence and all that jive when it was their screw-ups that brought this to fruition in the first place - Bennet by making the deal, Obama by backing this clown for office despite it.