Archive for September, 2008

Bailed Out or Posting Bail?

Tuesday, September 30th, 2008

While we wait to see whether the revolt against the Big Bailout survives, we can take some comfort in reports that numerous financial institutions are being investigated by the FBI and other law enforcement agencies for possible criminal violations in the practices that led the country to the current crisis.

The latest parties to find themselves on the hot seat are Fannie Mae and Freddie Mac, which yesterday revealed that they had received subpoenas from a federal grand jury in New York. According to a tally by Business Week, more than two dozen companies with roles in the financial mess have been investigated in the past year. It is heartening to think that more formerly high-flying Wall Streeters will be subjected to perp walks outside federal courthouses, as happened to two Bear Stearns hedge fund managers back in June (photo).

If the feds are aggressive about these investigations, we may learn that the corruption in the financial sector goes far beyond floating some overly risky securities.

Take the case of Wachovia, whose banking operations were just forced into the arms of Citigroup after its customers began to lose faith in the North Carolina institution. Wachovia’s problems were not just its portfolio of faltering mortgage-backed securities. Over the past year, it has been embroiled in a series of extraordinary scandals.

* In April 2008 Wachovia, accused by federal regulators of failing to take action against fraudulent telemarketers it knew were using its facilities to steal millions of dollars from unsuspecting victims, agreed to pay a fine of $10 million, contribute $9 million to consumer education programs and make up to $125 million in restitution to victims.

* That same month, the Wall Street Journal reported that Wachovia was being investigated as part of a federal investigation of Mexican and Colombian money-transfer companies believed to be involved in the money laundering for drug traffickers.

* In July there was a report on the Dow Jones Newswire that the Brazilian unit of Wachovia Securities (not part of the sales to Citigroup) was being investigated for aiding wealthy individuals commit tax evasion.

* In August Wachovia, following the lead of several other big financial institutions, agreed to buy back near $9 billion in auction-rate securities from investors who charged that they were misled into purchasing the volatile instruments.

And all this is apart from the Wachovia Securities broker in Ohio who, apparently on his own initiative, bilked millions of dollars from customers through fraudulent stock and real estate transactions. He was sentenced to four years in prison and ordered to pay more than $9 million in restitution.

Wachovia may be particularly unlucky that its alleged transgressions got discovered, but there is no reason to believe it is an isolated miscreant. Many of us have long suspected that fraud and corruption are rampant in the financial world. The pressures of the current crisis may finally expose the true extent of the rot.

The Strange-Bedfellows Uprising

Monday, September 29th, 2008

The financial sector has contributed more than $300 million to federal candidates in this election cycle – split evenly between Democrats and Republicans – but it apparently was not enough. Today a motley coalition of free-market-loving right-wingers, fiscally conservative Blue Dog Democrats and anti-corporate left-wingers came together to deliver a stunning rebuke to the Wall Street bailout plan concocted by the Bush Administration and the leadership of both major parties.

The House’s defeat of the $700 billion plan represents (for now, at least) a breakdown in the tradition of acceding to the wishes of Big Business and Big Finance, especially at times when those monied interests need to be saved from their own excesses. It has taken a financial crisis of monumental proportions to expose as never before the rift between the needs of the corporate elite and those of the rest of us.

It has been fascinating to watch this play out across the political spectrum. Conservatives clinging to the ideology of market supremacy find themselves in a clash with corporate elites who have jettisoned their laissez-faire sentiments in favor of unprecedented government intervention. Joining the die-hard conservatives are progressives who oppose the Paulson plan but see the crisis as an opportunity to push for even more aggressive intervention, on behalf of working families.

In between are corporate-friendly Democrats and Republicans who were forced to lash themselves to the mast of the Bush Administration’s wildly unpopular plan. They were proud to have forced Paulson to abandon his original power-grabbing proposal in favor of a bill that included an abundance of oversight and disclosure as well as some safeguards for taxpayers. Yet by retaining same basic bailout concept, they were seen as doing little more than putting lipstick and various other cosmetics on a giant pig of a plan.

By taking Bush and Paulson at their word on the necessity of the bailout, mainstream Democrats, who made up most of the losing side in today’s House vote, have put themselves in a precarious position. This was captured in a vignette in today’s Washington Post account of the marathon weekend negotiations on the ill-fated bill. After the conclusion of a post-midnight press conference, Secretary Paulson, who had been showing signs of exhaustion during the talks, locked arms with Democratic Sen. Chuck Schumer of New York “and leaned heavily on the senator for support as they walked away.”

By trying to act “responsibly” in this tumultuous situation, the Democratic leadership may be literally and figuratively taking on the albatross of the Bush Administration and its Wall Street supplicants. Whether this is a trap that was deliberately set for them is hard to determine at this point, but the result is that Democrats find themselves out of step with the new anti-corporate zeitgeist.

The apparent sea change in attitudes toward Big Business may have repercussions far beyond the current credit crisis. It may also be felt, for example, at the state and local level. Here at the Corporate Research Project and Good Jobs First, we deal all the time with another sort of corporate giveaway – the often huge economic development subsidy packages given to companies ranging from Wal-Mart and Cabela’s to Dell and Toyota.

While we tend to critique those subsidies because they lack job quality standards and take funds away from public schools, there are libertarians who oppose them as an unwarranted intrusion in the market. Perhaps the right-left uprising against the bailout can help us form more effective strange-bedfellows alliances in our work as well. Look out, Corporate America, you may get outflanked from both sides.

This piece is being posted simultaneously on Good Jobs First’s Clawback blog.

Will Pimco be the Blackwater of the Big Bailout?

Thursday, September 25th, 2008

If Congress approves the $700 billion bank bailout the Bush Administration is trying to force on the country through the threat of an economic mushroom cloud, the plan would not be carried out by career public servants. As in the war in Iraq, much of the grunt work would be contracted out to private companies. This raises the question: who will be the KBR or the Blackwater of the Big Bailout?

If William H. Gross has his way, the role will be played by his Pacific Investment Management Company, known as Pimco. Gross (photo) has been shamelessly promoting his firm as having the expertise and experience for the challenging job of using public money to buy up securities that in many cases may be nearly worthless.

When Pimco’s name first surfaced earlier this week, it appeared that the firm was trying to cash in on what would presumably be a bonanza of brokerage and asset management fees. Perhaps recognizing that this amounted to crisis profiteering, Gross gave an interview to the New York Times in which he offers Pimco’s services on a pro bono basis: “If the Treasury wanted to use our help, it would come, you know, free and clear.”

Is this one of the most selfless acts ever committed by a profit-making company, an egotistical play for personal glory, or a spectacularly audacious marketing ploy?

Gross can afford to be generous. His firm earns hefty fees each year managing portfolios (focusing on bonds) worth more than $800 billion for its clients, who are mainly “high net worth individuals” and institutional investors such as pension funds, university endowments and foundations. According to the Forbes 400, Gross has a personal net worth of some $2 billion.

The reason Gross’s offer may be taken seriously is that for the past year or more he was warning of the dangers of the subprime mortgage crisis while many in the financial world were trying to cover up the magnitude of the problem.

That’s all well and good. But it is also the case that Pimco is up to its neck in the crisis. Despite Gross’s concerns, the firm loaded some of its bond funds with mortgage-backed securities (MBS). Last May Pimco spent $2.6 billion to purchase the MBS portfolio of the Israel’s Bank Hapoalim. After Gross published a column last year in which he in effect called for the kind of rescue now being considered by Congress, blogger Mike Shedlock noted Pimco’s MBS exposure in a post titled “Bill Gross Wants PIMCO Bailout.”

This is the first of the problems with Pimco’s noble offer: it might not be so noble. PIMCO would in effect be helping to bail itself out. And perhaps also its parent, German financial conglomerate Allianz Group, which earlier this year wrote down the value of some $1.8 billion in asset-backed securities.

And that leads to the second problem: conflict of interest. Could Pimco, or any money manager for that matter, avoid the temptation to structure its purchases on behalf of the Treasury in a way that benefits its own private clients? The temptation might be even greater if the firm were not earning fees.

Even Gross’s friends are worried. Today’s New York Times piece quotes Luis Maizel of LM Capital Group as saying: “If you put this in Bill’s hands, Pimco is going to come out great, and I don’t know that the government will.”

Sounds like something you might say about the performance of Blackwater or KBR in Iraq.

The Tainted Money Managers Who Might Run the Bailout

Wednesday, September 24th, 2008

Treasury Secretary Henry Paulson found little support for his $700 billion Wall Street bailout while testifying before the Senate Banking Committee on Tuesday, but the varied concerns expressed by committee members did not include Paulson’s plan to turn over implementation of the bailout to private asset managers.

It would be a serious mistake for Congress to assume, as does Paulson, that only experts from the private sector could carry out the purchase of massive quantities of “troubled” assets. The entire bailout proposal is highly dubious, but letting for-profit firms handle the transactions would make a bad plan much worse.

I’ve been writing about the theoretical conflicts of interest that such an arrangement would create, especially if some of the banks getting bailed out also get chosen to help manage the asset purchases. The ethical issues, however, are not entirely in the realm of the hypothetical. While we don’t know exactly which firms would be chosen by Treasury, the overall money management industry has a track record that is far from unblemished.

Yesterday, as Paulson testified along with Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox, Cox’s agency put out a press release announcing that it filed an enforcement action against AmSouth Bank and AmSouth Asset Management “for defrauding AmSouth mutual funds by secretly using a portion of administration fees paid by fund shareholder for marketing and other unrelated expenses that should have been paid by AmSouth itself.” AmSouth, now part of Regions Bank, agreed to pay $11 million to settle the charges.

This case is hardly unique. The SEC’s archive of litigation releases includes a multitude of enforcement actions against small and large money managers and investment advisers. In one of those cases, Stephen J. Treadway, who had been a top executive at PIMCO, agreed in 2006 to pay $572,000 to settle charges of fraud, breaching fiduciary duty and other violations of securities laws. PIMCO is reported to be a leading contender for a bailout money management slot.

Money management firms, which can also function as securities dealers, have also come under fire from state regulators. Earlier this year, the financial giants Citigroup, Merrill Lynch and UBS were pressured by those regulators to buy back some $40 billion in volatile auction-rate securities they had pressed on unsuspecting customers. As the magazine Bloomberg Markets reported last January, state and local governments themselves have often been the victims of unscrupulous money managers who pressured them to invest public funds in extremely risky securities.

Given the discussion by Paulson of using a technique called reverse auctions to purchase toxic assets from banks, it is interesting to note that in 2006 a prominent money manager, Mario Gabelli, agreed to pay $130 million to settle charges that he defrauded the Federal Communications Commission during the auction of cell-phone licenses in the late 1990s.

And these are the kind of firms we are going to put in charge of $700 billion worth of transactions using taxpayer money? That may make sense to a 30-year Wall Street veteran such as Paulson, but Congress should know better.

The Dangers in Outsourcing the Bailout

Tuesday, September 23rd, 2008

A number of leading Democrats and Republicans expressed strong misgivings on Monday about the autocratic plan for bailing out Wall Street that Treasury Secretary Henry Paulson wants to ram through Congress. It remains to be seen whether this is mere posturing or serious opposition.

Critics are focusing on vital issues such as cost and oversight, but a lot less attention is being paid to the mechanics of Paulson’s proposal – specifically, the question of who would carry out the federal government’s purchase of $700 billion in “troubled” securities from banks. As I noted in my post on Sunday, the draft legislation circulated over the weekend includes a provision that seems to allow Treasury to contract out the process. Treasury then put out a fact sheet making it quite clear it intends to use private asset managers to manage and dispose of the assets it acquires, though the document does not specifically allude to the purchasing. Paulson himself referred to the use of “professional asset managers” during an appearance on one of the Sunday morning talk shows.

It amazes me that there is not more outrage over this aspect of the plan. Paulson seems to be leaving open the possibility that the same firms that are being bailed out could be hired to run the bailout. This would mean that institutions receiving a monumental giveaway of taxpayer money could turn around and earn yet more by acting as the government’s brokers. Aside from the unseemliness of this arrangement, this would be an egregious conflict of interest.

The alternative proposal floated by Senator Chris Dodd, which accepts Paulson’s language on contracting out, includes a section on conflict of interest. But rather than stating what the rules should be, the draft leaves it up to the Treasury Secretary to do so. There were reports on Monday night that Treasury would go along with the inclusion of a conflict-of-interest provision.

Paulson’s approach to the Big Bailout, particularly the insistence that there be no punitive measures for the banks, shows he is not the right party to oversee ethical issues. Paulson apparently can’t help himself. He still has the mindset of a man who spent more than 30 years working on Wall Street, at Goldman Sachs. He is a living example of the perils of the reverse revolving door: the appointment of a private-sector figure to a key policymaking position affecting his or her former industry.

The weak conflict-of-interest provisions Paulson is likely to impose would probably not address the inherent contradiction in having for-profit money managers running the bailout program. Even if Treasury chooses managers whose firms are not getting bailed out, there is still the danger that they will use their inside knowledge to benefit their non-governmental clients (and themselves) or will collude with buyers to the detriment of the public.

A Reuters story that ran on Monday reported that a leading contender for a federal money management role is Laurence Fink and his firm BlackRock, which was involved in managing the portfolio of Bear Stearns when that firm was sold to JPMorgan Chase as part of an earlier bailout. Last March, BlackRock, which is 49-percent owned by Merrill Lynch (now part of Bank of America), announced it was forming a venture to “acquire and restructure distressed residential mortgage loans.” Will Paulson see that as a conflict of interest – or more likely as a credential?

Letting financial firms that have profited from the mortgage crisis manage the bailout gives the impression that we are permanently in the grip of Big Money. To Paulson’s way of thinking, that’s not a problem, but it could make a bad plan much worse.

Bailout Bonanza?

Sunday, September 21st, 2008

It appears that the Paulson-Bernanke juggernaut has prevailed, and Congress will quickly approve the most radical federal market intervention in U.S. history with few or no concessions from the financial institutions that created the mess. Meanwhile, President Bush is playing the shill in this $700 billion con game, telling the public yesterday “I believe, when it’s all said and done…that the taxpayer is going to get a lot of that money back.” Fat chance.

Lurking behind the Big Bailout are two other issues that now deserve close attention: how the plan going to be implemented and who stands to make a killing. The draft legislation floated yesterday by Paulson is remarkably simple: a two-and-a-half page document that authorizes Treasury to buy the securities while raising the federal debt limit. There is no provision for creating a new agency to handle the transactions. In fact, the proposal would allow Treasury to outsource the process.

This seems to create the possibility that the same Wall Street investment banks being bailed out could receive contracts from the federal government to handle the transactions through which toxic mortgage-backed securities are removed from their balance sheets. Presumably, the investment banks would expect to be paid for this brokerage service by receiving a percentage fee on each deal. The cost to the federal government would be in the billions, providing a bonanza for Wall Street on top on the enormous benefits from the bailout itself.

Apart from the matter of brokerage fees, there is the question of the terms of the transactions. The draft legislation is silent on what price the federal government should pay for the tainted securities: the price at which the institution purchased them, the value after the write-downs many institutions have implemented, or the current market value. Treasury has floated the idea of using reverse auctions to get the best price, but it is unclear why institutions would bid the price down if the feds are buying everything in sight. Besides, if investment banks are put in charge of purchasing securities from one another, they will have little incentive to get the best deal for Uncle Sam, thus escalating the cost of the bailout.

It would be nice to think that Paulson & Company will take steps to bar this sort of gross conflict of interest as well as a fee windfall, but don’t count on it. If there are any members of Congress still willing to stand on principle, they should insist that no financial institution getting bailed out be eligible to receive a contract to help implement the plan. If the bailout can’t be stopped, let’s at least prevent an additional bonanza for Wall Street.

Rescuing the Rest of Us

Friday, September 19th, 2008

Bailing out individual companies such as AIG is one thing. Today’s newspapers are filled with astounding reports that the federal government is devising a plan to bail out the entire financial sector—by taking over all the toxic assets that pollute the balance sheets of banks and other institutions. There is talk that this scheme is patterned on the savings and loan rescue of a generation ago. But unlike that rescue, the idea now is that the feds would, as the New York Times puts it, “take over only distressed assets, not entire institutions.”

“Bailout” hardly begins to capture the magnitude of what is being considered—apparently with bipartisan consent from Congress. This is absolution: the full faith and credit of the United State are being marshaled to absolve financial institutions of their sins. The consequences of years of greed, imprudence and short-sightedness would be wiped clean. With their financial souls thus renewed, we are supposed to believe banks will go forth to lend and invest with care and integrity.

One’s first instinct is to denounce this outrageous use of taxpayer money to rescue wealthy institutions that brought this problem on themselves, and will inevitability do it again. But perhaps that’s not the best response. The severity of the crisis has created openings for unprecedented government intervention. But why should banks get all the benefits? If Uncle Sam’s wallet is wide open, why shouldn’t the rest of us share in the largesse?

If banks are going to have their balance sheets cleansed, why can’t the same be done for the household accounts of America’s working families? Here’s the outline of a program for bailing out the rest of us:

  • Wipe out unpaid medical debts of the uninsured and the underinsured;
  • Wipe out credit card debt for all households with less than the median income;
  • Wipe out subprime mortgages and give immediate title to the homeowners;
  • Wipe out payday loans and all other predatory lending obligations;
  • Wipe out unpaid student loan debt for those earning less than the median income; and
  • Wipe out auto loans and other installment loans for those earning less than the median income.

Sounds unrealistic, ridiculously expensive? Probably so, but it would be no less outlandish than the proposals being made to benefit financial institutions that have brought the country to the brink of economic collapse. If now is a time for bold moves, let’s see some audacity on behalf of the many, not only the few.

AIG: Laissez-Faire R.I.P.

Wednesday, September 17th, 2008

The federal government’s takeover of American International Group marks the end of three decades during which we have been made to worship at the altar of “free” markets and deregulation. The religion of unbridled capitalism is dead, replaced by a new theology of ad hoc intervention and selective lemon socialism.

Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are reshaping the financial landscape with the zeal of 1920s Soviet central planners. The difference is that they don’t seem to have a five-year plan. They are rushing from crisis to crisis, making up policies as they go along.

Bear Stearns is forced to merge into JPMorgan Chase, with the Fed backing up some of Bear’s riskier investments. Fannie Mae and Freddie Mac are placed into federal “conservatorship.” Merrill Lynch is thrust into a shotgun marriage with Bank of America. Lehman Brothers is forced to file for Chapter 11 bankruptcy, paving the way for Barclays to swoop in and buy its viable assets at a bargain-basement price. AIG is given a cash infusion of $85 billion, in exchange for which the federal government becomes an 80-percent owner of the insurance company.

The “invisible hand” of the market has been replaced by a ham-handed approach that puts expedience over coherence or prudence. The desperate way in which these emergencies are being handled is indicative of just how screwed up the financial system has become.

In many ways, the crisis at AIG is the most troubling of all. Unlike Bear, Merrill and Lehman, AIG was not supposed to be part of the casino-like world of investment banking. As an insurance company, it presumably had a responsibility to be somewhat more staid. In fact, it does have units—property & casualty coverage, aircraft leasing, etc.—that are doing well and will probably be sold off to raise cash.

What brought AIG down is its Financial Services segment and particularly its “credit products,” described opaquely in its 10-K filing as “credit protection written through credit default swaps on super senior risk tranches of diversified pools of loans and debt securities.” AIG, it seems, has been insuring the esoteric financial investments being made by others. It may be a good idea for investors — especially institutions like pension funds — to arrange for some protection when putting money in risky securities. But it turned out that the party doing the insuring, AIG, lost control of the process.

Last February, AIG disclosed that its auditors had found a “material weakness” in the company’s oversight of its credit default swap portfolio. That’s a polite way of saying it might have been cooking the books in terms of its exposure to swaps relating to mortgage-backed securities that were plunging in value.  It later came out that the Securities and Exchange Commission and the Justice Department were investigating whether AIG deliberately overstated the value of its swap position.

So let’s see if I got this straight. A company that was supposed to provide protection for speculators became a speculator itself and may have tried to hide how deep a financial hole it had fallen into.  And the same federal government that was investigating AIG now owns it. A fitting symbol of the end of market fundamentalism.

Addendum: Here’s some coverage of one of the previous instances in which AIG faced a government takeover—when the revolutionary government of Iran nationalized its subsidiary in that country in 1979. It remains to be seen whether the current takeover turns out any better. Click on the following link to see an excerpt from the New York Times of June 26, 1979.  The reference to AIG is in the last paragraph. (more…)

Lehman’s Bad Karma

Monday, September 15th, 2008

The downfall of Lehman Brothers is bad news for its employees and shareholders, but it is difficult to avoid the feeling that, apart from the laws of the market, the law of karma may be at work as well.

After all, Lehman was a firm built on a slave economy. It was founded as a cotton brokerage by a German family that emigrated to Alabama in the 1840s. According to Robert Rosen’s book The Jewish Confederates, partner Mayer Lehman (image) was an active supporter of the Confederacy. In 1864, the governor of Alabama enlisted him in an effort to help Southern prisoners of war being held in the North, describing him in a letter to Jefferson Davis as “a foreigner” but “thoroughly identified with us.” The Lehmans helped rebuild the economy of Alabama after the Civil War.

Some 130 years later, Lehman Brothers got involved in financing what some have called a new form of slavery: private prisons. During the late 1990s Lehman was a key underwriter for securities issued by Corrections Corporation of America, by CCA’s real estate investment trust spinoff, and by some of CCA competitors.

More relevant to the current crisis is the fact that Lehman was a pioneer in the dubious business of packaging subprime loans as collateral for high-yield bonds. It provided major financial backing for First Alliance Corp., a leading practitioner of predatory lending. For this reason, Lehman was targeted by activist groups such as ACORN, and in 2000 the firm was sued by some of First Alliance’s victims. A federal jury in the case later found that Lehman had aided and abetted First Alliance in its scheme to cheat borrowers.

Despite these early signs that securitization of shaky mortgages might have drawbacks, Lehman charged ahead. Not only did it encourage investors to take the plunge, the firm filled its own balance sheet with some $300 billion in mortgage-backed securities. Lehman paved the way for the crisis that is roiling the financial world and became one of its prime victims.

According to a 2004 article in the Wall Street Journal, Lehman CEO Richard Fuld used to tape critiques of his son’s hockey performance while watching games from the bleachers. When the boy played better, he was rewarded with Lehman stock. Assuming he held onto those shares, one can only wonder how the younger Fuld feels now that the fruits of his efforts are virtually worthless. Perhaps a bit like all those people who lost their homes to the predatory lending backed by his father’s firm.

“Ethical Failure” and Offshore Oil Drilling

Friday, September 12th, 2008

The phrase repeatedly chanted at the recent Republican convention — “Drill, Baby, Drill” — now sounds pornographic in the wake of the new sex and money scandal involving oil drilling companies and the federal agency that is supposed to oversee them. The Interior Department’s Inspector General has just come out with allegations that more than a dozen current and former staffers at Interior’s Minerals Management Service received improper gifts from industry representatives, who also put on wild parties for MMS employees. Gregory Smith, former director of the royalty-in-kind program at MMS, was also accused of having an illicit sexual relationship with an subordinate and paying her to buy cocaine.

The three reports just submitted by Interior IG Earl E. Devaney (photo) may be the most salacious government documents since the 1998 Starr Report on President Bill Clinton’s sexual peccadilloes.

Although the Interior Department website prominently features Secretary Dirk Kempthorne’s outraged response to the revelations, it does not see fit to provide the reports themselves. Fortunately, ProPublica, the online investigative reporting site, has posted the reports for all to view. Here are some highlights:

First there is a cover memo from Devaney decrying what he calls “a culture of ethical failure” in which some MMS employees adopted a “private sector approach to essentially everything they did. This included effectively opting themselves out of the Ethics in Government Act.” The private sector itself also comes in for criticism. Devaney suggests that the oil companies overseen by MMS were not especially helpful in an investigation that took more than two years and cost nearly $5.3 million. Chevron, Devaney states, refused to cooperate with the probe.

The first of the three reports focuses on Smith, who seems to have been confused about who was actually employing him. The report says he spent a substantial amount of his paid time doing work not for the federal government but for a private firm called Geomatrix Consultants that worked for oil industry clients. Smith also is said to have received improper gifts from employees of Chevron, Shell and a small operator called Gary Williams Energy Company.

The second report focuses on the people who worked under Smith. Apparently following his lead, many of them, according to Devaney, “developed inappropriate relationships with representatives of oil companies doing business with” MMS. Some of these relationships were pecuniary: two staffers were said to have received prohibited gifts from major oil companies on at least 135 occasions. Here, too, the gifts came from Chevron, Shell and Gary Williams as well as Hess. The report also reports on some brief “intimate” relationships a couple of MMS employees had with oil industry people. The sexual misconduct seems to have been a lot more limited than the other hanky panky, but it is irresistible to talk about regulatory agency employees’ being literally in bed with the industry at a time when some major oil companies are involved in a multi-billion-dollar dispute with MMS.

The final report focuses on Lucy Denett, the former associate director of minerals revenue management and the highest-ranking MMS staffer to have been caught up in the scandal. Denett is mainly accused of being overly generous to her Special Assistant Jimmy Mayberry as he was getting ready for retirement. According to the report, she improperly arranged a lucrative consulting contract for the firm Mayberry was going to set up after he left the agency.

Mayberry is said to have pleaded guilty to a criminal charge. The cases against Smith and Denett were referred to the Justice Department. Devaney asks Interior Secretary Kempthorne to take disciplinary action against the remaining employees involved. It would be nice if someone thought to take some action against those drilling companies, which seemed to have had no hesitation in corrupting federal employees. But then again, “ethical failure” is nothing new in the oil industry.