On July 2nd, Senator Charles Grassley (R-Iowa) posed written questions to James Cole, the Obama administration’s nominee for the post of Deputy Attorney General. Many of these questions focused on Cole’s role as the Independent Consultant placed at AIG from 2005 through 2009 as part of two deferred prosecution agreements (DPAs). The first of these DPAs resulted from charges of aiding and abetting securities fraud in the AIG Financial Products subsidiary based in London, the AIG appendage that crashed the world economy in 2008 and required a $182 billion bailout courtesy of the US taxpayer. Some of Cole’s responses to Grassley’s questions were both puzzling and contradictory, and others we know to be misleading.
Under the terms of the 2006 DPA, Cole was asked to examine “the adequacy of whistleblower procedures designed to allow employees or others to report confidentially matters that may have a bearing on AIG’s financial reporting obligations.” In written questions Grassley asked Cole to provide a “discussion of the scope of your work under the 2006 DPA.” In response, Cole simply quotes from the DPA, which is, of course, available to Senator Grassley and the rest of the world on the DOJ website. A meaningful written discussion of whistleblower procedures at AIG would have to include an account of the layoff of ten compliance attorneys and officials in the aftermath of the corporation’s financial collapse in September 2008. Several of the ten were whistleblowers who had written to senior management at AIG about deficient compliance procedures. None of them was interviewed confidentially by Cole, who acceded to the demand of Suzanne Folsom, then Chief Compliance Officer, that Cole interview her staff only when she or her designee were present. As a result, the whistleblowers were summarily terminated under guise of a staff reduction.
The public finally got a look at the trio who ran AIG aground before the bailout in 2008 when they appeared before the Financial Crisis Inquiry Commission yesterday. Joseph Cassano, Martin Sullivan and Robert Lewis seemed defiant and pained, still stunned and humiliated, respectively. The New York Times articles (here and here) and the questioning yesterday explain the sheepishness and shame on display with the AIG executives who testified. At AIG-FP (Financial Products), Cassano had encumbered the AIG holding company with enormous uncapitalized and unhedged long-term risk based on a single market trend: the upswing in US housing prices. This is like betting your house that one horse will win the Derby because it’s been winning up until now. In this case, we now know that the horse was feeling queasy by 2005, so why Cassano did this remains unclear. Based on yesterday’s testimony, neither Sullivan nor Lewis ever asked him.
What is clear is that AIG-FP under Cassano had inexplicable corporate autonomy, even after senior management knew that he was sinking the ship. By 2006, AIG-FP had stopped insuring CDSs (credit default swaps) based on mortgage-backed securities because even the “experts” working for Cassano knew the deals were rotten. These guys were careful to keep this to themselves, however, and James Cole, the Independent Consultant installed at AIG by the SEC and the Justice Department to review AIG-FP transactions from 2000 – 2005, failed to spot it. Part of the reason for the blind spot that affected Cole is explained by the recommendations for compliance (p87) that he himself set out in 2007. When Cole recommended the establishment of a Committee to oversee the transacting of derivatives, which would have encompassed oversight of the CDSs insured by AIG-FP, he wrote:
The Derivatives Committee should be responsible for providing an independent review of proposed derivative transactions or programs entered into by all AIG entities other than AIG Financial Products Corp. (“AIG-FP”).
These recommendations, made in September 2007, show Cole’s explicit intention to keep his eye off the ball, even though, a 2004 deferred prosecution agreement between AIG, the Department of Justice (DOJ), the SEC and the New York State Insurance Commission– placed him at AIG to review potentially fraudulent AIG-FP transactions.
Cole, of course, has now been nominated to serve as the Deputy Attorney General at DOJ, where he would help to decide who should and should not be prosecuted. Cole does not appear to be the ideal candidate for this slot, based on his performance at AIG.
Bea Edwards is the International Reform Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.
For the past two months, GAP has criticized the nomination of James Cole to be Deputy Attorney General at the Justice Department (DOJ). We have argued that because Cole, who served as Independent Consultant at AIG during the critical time period from 2005 through 2009, missed clear signals of malfeasance, he is unsuited to serve as the second-in-command at the DOJ.
Last week, after four senators requested Cole’s reports to DOJ about AIG, prior to deciding on his nomination, a DOJ spokeswoman defended Cole’s role at AIG, telling Main Justice that
Critics who suggest that Mr. Cole was somehow too close to AIG misunderstand his relationship with the company,” …. “His presence was imposed on the company by a federal court. In fact, as the [Congressional Research Service] report notes, AIG executives tried to have him removed.
“[Cole] was never a general overseer or monitor of AIG’s entire operation nor was he assigned to examine many of the issues involving AIG’s near collapse, such as credit-default swaps or retention bonuses…”
This statement did more to obscure Cole’s role at AIG than to clarify it. First, although it’s true that in late 2008, Chief Compliance Officer Suzanne Folsom mounted an effort to remove Cole, it was not because he was insisting on a tough compliance regime. Folsom wanted him out because he was pocketing too much AIG money. His costs, as Independent Consultant, included not just the $20 million paid to his law firm, but tens of millions more for the consultants, who, we understand, were both expensive and incompetent.
A substantial part of the consulting fees apparently went to DLA Piper, the law firm where Anastasia Kelly, AIG General Counsel, parked herself in 2010, after fleeing AIG in order to avoid pay caps imposed by the TARP regulations.
Second, although it’s also true that Cole was not a general overseer of AIG, he failed to object when Folsom dismissed half the team that was working on compliance and oversight just after AIG had to be rescued by taxpayers in 2008. Many of these people had written to the board and to the CEO to expose AIG’s weak compliance program before the meltdown. When Cole did finally interview them, he acceded to Folsom’s demand that she or her designee be present to observe the conversations. This collaboration is simply inconsistent with the responsibility of an independent monitor.
Fourth, Cole was assigned under the 2004 deferred prosecution agreement to review five years of transactions effected by the problem division, AIG-FP. This assignment would specifically have included credit default swaps as well as other fraudulent maneuvers designed to conceal liabilities.
Finally, no one has suggested that the retention bonuses paid in 2009 were involved in AIG’s near collapse. The bonuses were paid after the collapse, and critics questioned the propriety of paying bonuses to those responsible for the crisis. More cynical critics have instead suggested that the putative ‘retention bonuses’ were, in fact, hush money, since a number of people who received them have left the firm. Critics are also wondering if the second round of retention bonuses was paid in 2010.
The Senate Judiciary Committee held James Cole’s confirmation hearing yesterday morning for the post of Deputy Attorney General. It was not exactly an aggressive interrogation. Democratic members of the committee sought Cole’s commitment to continuing the reforms at the heretofore highly politicized Justice Department (DOJ), and Republican committee members wanted assurances that Cole, as the new Deputy Attorney General, would not guarantee Miranda rights to suspected terrorists. There were three or four allusions to Cole's role as an independent monitor at AIG in the years leading up to the financial crisis that brought the company down and wrecked the US economy, but no specific questions were forthcoming. Not from anyone.
In fact, the entire proceeding had the feel of a pro forma procedure along the way to confirming James Cole to be the second-in-command at DOJ. There were various ironic moments, however. For one thing, a number of senators sought assurances from Cole that he would hold BP accountable for the damage now being sustained by states along the Gulf coast as a result of the ongoing oil spill. For his part, Cole guaranteed that, if confirmed, he would make every effort to extract compensation from BP for those whose livelihoods were endangered by the thickening and widening slick of scum.
Asking Cole about corporate accountability in the BP case is like asking “Brownie” how he would handle another hurricane in New Orleans. It’s beside the point. Cole has a five-year record of responsibility for corporate oversight and compliance at AIG, where he failed to hold either individual managers or the corporation itself accountable for the catastrophe they visited upon US credit markets. In throw-away comments at yesterday’s hearing, Cole assured the committee that as Deputy Attorney General he would dedicate himself to combating mortgage fraud and financial fraud. When he made this statement, neither he nor his questioner (Senator Ted Kauffman, D-De.) made any reference to his recent past at AIG, where the Financial Products Corporation encumbered the corporate balance sheet with tens of billions of dollars in worthless real estate bonds as Cole looked the other way.
Inside Sources Prompt Questions about James Cole’s Record at AIG as Independent Monitor
The Government Accountability Project (GAP), which has been critical of the nomination of James Cole since he was rumored to be on the short-list for Deputy Attorney General, has posted mock questions for members of the Senate Judiciary Committee to pose to Cole at his confirmation hearing later today.
Cole was nominated by the Obama administration last month to be second-in command at the Department of Justice. For years, Cole has served as the Independent Consultant (IC) stationed at insurance behemoth AIG as a result of two deferred prosecution agreements (DPAs) between the corporation, the SEC, and the Department of Justice in 2004 and 2006. The DPAs were put in place as part of a settlement when AIG previously faced massive fraud charges.
“The administration is trying to deflect attention from Cole’s poor record of oversight at AIG in the years leading up to the financial crisis by claiming he was not asked to monitor the troubled subsidiary,” said Bea Edwards, GAP’s International Program Director. But in fact, it was Cole’s own decision that exempted that subsidiary from his scrutiny.”
When rumors of Cole’s potential nomination began to emerge in April, GAP began receiving frequent and disturbing calls from AIG alumni and current staff about serious problems with Cole’s actions during his tenure. Since then, Edwards has been steadily posting blog entries about Cole based on the disclosures we have received.
In advance of this hearing, Edwards has produced a primer on Cole’s role at AIG, followed by five questions GAP believes should be asked at the hearing.
Reilly quoted Cole's defenders’ claim that “his work did not specifically include the major issue that nearly led to the company’s demise – namely credit default swaps.”
This explanation for Cole’s myopia and his astonishing ability to miss the unmanageable risk that brought on the meltdown at AIG is superficial and disingenuous. The key word is “specifically.” According to our sources, the problem was not simply credit default swaps (CDSs), but rather the way in which AIG-Financial Products (AIG-FP), the division that primarily generated and traded them, was exempted from compliance obligations and oversight. On May 26, 2010, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel on TARP, said in her opening statement chairing the hearing:
“The company [AIG] was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."
In contrast to Warren’s opinion, Cole did not seem to perceive structural problems with regulatory oversight and legal compliance at AIG. On the contrary, when writing about AIG compliance in August 2008, he reported to DOJ and the SEC,
“Each compliance plan will be submitted to the OC (Office of Compliance) for review and approval to ensure that the plan has adequately provided controls for addressing all identified compliance risks.”
This, according to Cole, was a reasonable and achievable goal. Next to this text in his table of goals, Cole placed a green dot, meaning progress toward the goal was advancing without problems.
Cassano was the CEO at AIG-FP, Forster was the head trader and executive vice president and Athan was a managing director. None of them will be the subject of criminal prosecution, according to the Washington Post.
So, just about two years after AIG nearly runs the international economic system over a cliff, the Justice Department decides there was no criminal wrongdoing and the former AIG monitor is selected to run the day-to-day operations of the Justice Department. Although Cole, as the Independent Consultant (IC), was not monitoring the risk-taking that contaminated AIG-FP, the decision to leave the unit to operate without oversight was at least partially his.
According to one source at AIG, the prevailing storyline – that AIG-FP was a rogue unit operating largely beyond the regulatory reach of its corporate parent – is a myth. If the senior management and the board of the corporation office did not know about the magnitude of the financial risk assumed by AIG-FP, this was willful ignorance.