By Pam Martens: October 21, 2013
As the U.S. sinks to a rank of 19 on Transparency International’s list of the least corrupt countries, President Obama has issued a proclamation declaring this to be the week that we come together as a Nation to reflect on our moral values. The President’s Proclamation reads in part:
“…During National Character Counts Week, we reflect on the ways we support one another, the ways we come together and seek common ground, and the lessons we teach our children about what citizenship means in the United States of America…The children we raise today are surrounded by proud examples of integrity, and moral courage, but it is our task as parents, community members, and leaders to teach them not only the skills they need to succeed, but also the values that keep our country strong…”
Yes, our children are surrounded by wonderful, wholesome role models – from parents to teachers to community volunteers. But something insidious is happening elsewhere in our Nation that is polluting the minds of college students to believe that amoral behavior is a condoned fast track to business success in America. Specifically, individuals who have had serious and credible charges of corruption leveled against them are being held up as the epitome of good business role models. New York University stands out for this behavior.
Take the case of hedge fund manager, John Paulson, who has an auditorium named after him at New York University’s Stern School of Business as well as serving on the University’s Board of Trustees. (The naming followed a $20 million donation to the university by Paulson.)
On April 16, 2010, the SEC accused Paulson’s hedge fund of conspiring with Goldman Sachs in the infamous 2007 ABACUS deal “to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.” In other words, Paulson helped to build a portfolio designed to fail with a motivation of self enrichment.
The SEC complaint goes on: “…after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS [Residential Mortgage Backed Securities] portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.”
According to the SEC’s complaint, Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By October 2007, 83 percent of the bonds in the portfolio had been downgraded and 17 percent were on negative watch. By January 29, 2008, 99 percent of the portfolio had been downgraded. The SEC estimated that investors lost more than $1 billion in the deal. It is estimated that Paulson made $1 billion.
Paulson was never charged with a crime because it was Goldman, not Paulson, that misrepresented the deal to investors. That one can be alleged to have engaged in serious wrongdoing with a major Wall Street firm by the Securities and Exchange Commission, escape prosecution, and still have one’s name plastered in shiny letters across a business school facility nurturing and molding the impressionable young minds of the next generation of business leaders is but one tiny example among legions of corrupting influences in the United States.
The President himself has fueled the feeling that unbridled corruption reigns and reaches into the highest levels of government. Of all the individuals that the President could have tapped to lead the U.S. Treasury Department, Jack Lew was a most problematic candidate.
Lew worked at Citigroup from 2006 through early 2009 in a job that paid him millions, including a $940,000 bonus in early 2009 that was paid with bailout funds from the U.S. taxpayer after the company became insolvent from soured mortgage bets. Lew served as Chief Operating Officer of the very division that the SEC charged with hiding $39 billion of subprime debt off its balance sheet in Structured Investment Vehicles (SIVs). That bonus was just the tip of the iceberg for Lew. He had invested in a fund in the Cayman Islands at the very street address that the President had called a tax scam.
And, once again, NYU’s name comes into the equation. Lew received a $1.4 million loan from New York University, a taxpayer subsidized nonprofit, to buy a lavish home in the Riverdale section of the Bronx; he accepted forgiveness of large amounts of the loan and a reimbursement of the interest charged on the loan from the University. According to Senator Grassley, Lew stonewalled the Senate on answers during his confirmation process.
Then there was the nomination and confirmation of Mary Jo White to lead the major regulatory body of Wall Street – the Securities and Exchange Commission. White and her husband, John White, through their respective law firms, had provided legal representation to every major Wall Street firm. Under SEC rules, the conflicts of the spouse become the conflicts of Mary Jo White.
The list of the President’s deeply conflicted nominees and advisors are legion. A standout example includes the months the President pushed forward his intention to nominate Larry Summers as Chairman of the Federal Reserve – perhaps the most important monetary position in the world – despite protests of outrage from Democrats, Republicans and Independents. Summers was part of the muscle that had forced the deregulation of Wall Street’s derivative contracts, repealed the depression-era investor protection law known as Glass-Steagall, leading to the 2008 financial implosion and economic collapse. Only after the outrage reached the opinion pages of major newspapers did the President relent and nominate Janet Yellen for the post.
The perception of corruption in the United States is backed by data. Bribery has turned into an epidemic according to the 2013 Global Corruption Barometer issued by Transparency International. According to the survey, 7 percent of those polled in the U.S. said they bribed the police, 11 percent said they bribed educators and 15 percent said they bribed judges. (When one is willing to risk prison to bribe a police officer or a judge, it means there is a general perception that these individuals are willing and eager to accept bribes.)
This data poses an even greater risk to the Nation: when citizens believe the institutions they would typically turn to in order to report corruption are themselves corrupt, the contagion feeds on itself. Transparency International reported the following stunning numbers for the U.S. in its 2013 Global Corruption Barometer: 42 percent of respondents feel the judiciary is corrupt or extremely corrupt; an equal number, 42 percent, feel the police are corrupt or extremely corrupt; and a whopping 76 percent feel that political parties are corrupt or extremely corrupt.
The President’s Proclamation called for “public officials, educators, parents, students, and all Americans to observe this week with appropriate ceremonies, activities, and programs.” NYU’s Board should commemorate the week by tearing down the Paulson sign at the Stern School of Business, and hiring an independent, credible outside monitor to assess the multiple means through which it may be corrupting the educational environment of tomorrow’s leaders.