Lagan Sebert stories from The Center for Public Integrity

Dodd’s departure could endanger potential consumer agency

2011-10-12T16:23:27-04:00

It’s the question buzzing around Washington and Wall Street this week: Will Sen. Christopher Dodd’s sudden retirement announcement further jeopardize his already thorny task of overhauling the nation’s financial regulatory system?

At risk in particular, some Capitol Hill observers say, may be a proposal to create a new consumer protection agency that President Obama has characterized as a must for financial reform.

Dodd, a Connecticut Democrat who announced Wednesday that he will not seek re-election in November after 35 years in Congress, is chairman of the Senate Banking Committee. As chair, Dodd is in position to rewrite the rules for Wall Street in the wake of the most debilitating financial crisis since the Great Depression. The U.S. House passed its own sweeping financial package last month with the consumer agency as the centerpiece.

There are two schools of thought on how Dodd’s planned departure will impact legislation. Financial industry insiders surmise that Dodd, short on political capital, will run out the clock on his last year in office or look for a quick bipartisan compromise. On the other hand, consumer advocates believe that Dodd, now free from the constraints of fundraising and campaigning, will want to burnish a legacy as the man who set the bankers straight.

In a press conference Wednesday, Dodd did not directly address the future of his reform package. But amidst staunch Republican opposition, some aspects of his broad effort, such as the proposed consumer agency, have seemed endangered for weeks. The new independent body would regulate financial products such as mortgages and credit cards.

Days after the House approved a consumer agency, Dodd’s counterpart in the House, Rep. Barney Frank, expressed concern that the provision would not survive the Senate.

“The one [provision] that I am most worried about is the consumer agency,” Frank said in an interview with the Huffington Post Investigative Fund last month. “We have been talking to Senator Dodd,” Frank said, “but I am worried that he’s not going to be able to get Republican support or 60 Democrats for a vigorous consumer agency.”

Frank should know. He spent much of last year fighting Republicans, pro-business Democrats and industry lobbyists over the agency. (The Chamber of Commerce remains the fiercest opponent of the agency and has vowed to turn up the heat in the Senate battle.) Ultimately, no Republicans supported Frank’s plan even though it exempted some key sources of consumer loans--auto dealers, smaller banks and student lenders — from the agency’s oversight.

When Dodd first formally proposed the consumer agency in an 1,136-page draft bill last fall, the banking committee’s ranking Republican, Richard Shelby, lambasted the idea.

“An agency that requires financial firms to provide products to consumers repeats the same dangerous practices that led to unqualified consumers receiving mortgages they couldn’t afford,” Shelby said at a Nov. 19 committee hearing. The Alabama Republican added that he would be opposing Dodd’s bill, which he said needed a “complete rewrite.”

But on Dec. 23, in the spirit of the season, Dodd and Shelby released a joint statement saying they had made "meaningful progress" toward resolving their differences. A compromise, they said, might be reached by the end of January.

The sooner the better, reform advocates believe. If the Senate fails to pass a bill this year, Sen. Tim Johnson, a business-friendly Democrat from South Dakota would replace Dodd at the helm of the banking committee. Johnson was the only Senate Democrat last year to oppose new regulations of the credit card industry, which is largely headquartered in his state.

Whatever the end result, Frank said in a statement Wednesday that he anticipated Dodd would push ahead with the challenging political battle. “I will miss his leadership in future Congresses, but I do look forward to working closely with him for the rest of this year on finishing the job of significant financial regulatory reform, to which he is committed, and to which he has already worked to advance," Frank said.

How Wall Street can still win

2011-10-13T11:10:20-04:00

As the battle over Wall Street reform shifts venues — from Capitol Hill to federal agencies — industry lobbyists who oppose some new regulations outnumber consumer advocates 50 to 1, an analysis of lobbying disclosure data shows.

Although Congress passed and President Obama signed the Wall Street Reform and Consumer Protection Act last month, Congress did not iron out many of the law’s details. Lawmakers instead left that task up to regulators such as the Securities and Exchange Commission, FDIC and Federal Reserve.

Over the next two years, the regulators must conduct more than 60 studies and write some 250 rules. This process is well suited to seasoned industry lawyers and lobbyists who are skilled at analyzing the nitty gritty of proposed regulations.

Even before the battle moved to the regulatory agencies, “the corporate onslaught was breathtaking,” said Heather Booth, a top lobbyist for a coalition of consumer groups pushing for new restrictions on Wall Street.

Since 2009, more than 3,000 lobbyists for banks, Wall Street trade groups and financial firms have lobbied Congress and the regulators about financial reform, according to Senate lobbying data assembled by the Center for Public Integrity, a nonpartisan journalism organization.

Consumer advocates are largely limited to Booth’s coalition, Americans for Financial Reform, which tapped about 60 lobbyists from consumer groups such as the Center for Responsible Lending, Consumer Federation of America and major labor unions.

The U.S. Chamber of Commerce alone has 85 lobbyists fighting various aspects of financial reform.

Trade groups and law firms specializing in financial services are still hiring, lobbyists told the Huffington Post Investigative Fund. This year, megabank Goldman Sachs added a member to its team of persuaders, bringing the total to 45, some of whom once worked on Capitol Hill or at the SEC.

At first, lobbyists for Booth’s consumer coalition were less schooled or connected. The “rag-tag band,” as Booth called them, met every Friday for a year to learn about such arcane topics as derivatives. They had a budget of $1.4 million, a tiny fraction of what the industry so far has spent on lobbying.

Yet in the limelight of Capitol Hill, Booth was able to press her case with lawmakers over several months and eventually won key victories in the financial reform law, including the creation of an independent consumer financial protection bureau.

Her team faces greater challenges in the little-noticed labyrinth of the federal bureaucracy.The financial industry’s lopsided advantage is more pronounced there because federal bureaucrats rely on data, research and elaborate reports that typically only well-funded groups produce.

Once regulators propose a new rule lobbyists and lawyers spend weeks crafting response letters, which routinely exceed 30 pages.

Whereas in congressional lobbying, "you have a minute or 30 seconds to make your case, with the regulatory process you have pages and pages,” said Scott Talbott, a senior vice president and top lobbyist for the Financial Services Roundtable, a trade group that represents some of the nation’s largest financial services companies. “The lawyers are enjoying this; it sounds sort of morbid but this is a lot of work for the lawyers.”

Booth isn't slowing down either. Her team is meeting with Obama administration officials this week to discuss the next steps for financial reform.

Still, some policy experts worry that the industry’s competitive advantage drowns out consumers’ viewpoints.

Take, for instance, recent rules that international bank regulators proposed to address a main cause of the financial crisis — a banking industry that didn’t set aside enough for a rainy day. During a four-month comment period, the Basel Committee on Banking Supervision received 273 letters on its proposal to increase capital requirements for banks. Most all comments came from an array of industry groups and banks, while only 27 came from consumers.

“The industry reps are highly organized and well funded,” said Gary J. Edles, a former senior official at regulatory agencies overseeing aviation, the courts and the nuclear industry.

“If my mother-in-law has a serious problem over something, it’s kind of tough for her to marshal all the data to demonstrate that this is a nationwide problem,” said Edles, now a professor of administrative law at American University. “It is far less difficult if the Chamber of Commerce of the United States thinks it is a big problem.”

How Wall Street can still win

2011-10-13T11:10:20-04:00

As the battle over Wall Street reform shifts venues — from Capitol Hill to federal agencies — industry lobbyists fighting a regulatory overhaul outnumber consumer advocates 50 to 1, an analysis of lobbying disclosure data shows.

Many Americans are familiar with the notion that Congress passed and President Obama signed the Wall Street Reform and Consumer Protection Act last month. But Congress did not iron out many of the law's details. Lawmakers instead left that task up to regulators such as the Securities and Exchange Commission, FDIC and Federal Reserve.

Over the next two years, the regulators must conduct more than 60 studies and write some 250 rules. This process is well suited to seasoned industry lawyers and lobbyists who are skilled at analyzing the nitty gritty of proposed regulations.

Follow-up: Baltimore lawmakers seek overhaul of tax lien sale

Baltimore,Maryland,United States — 2011-10-12T23:57:23-04:00

It’s too late to help Vicki Valentine — the Baltimore woman who lost her family’s mortgage-free home over an unpaid water bill of $362—but city officials are trying to prevent others from suffering the same fate.

The Huffington Post Investigative Fund first told Valentine’s story in May as part of an ongoing examination of tax lien sales nationwide. Counties in Maryland, like many other states, sell investors the right to collect unpaid property taxes and other municipal debts of $250 or more. The law allows lien holders to charge double-digit interest rates and in some cases thousands of dollars in fees. Homeowners must either pay or face foreclosure on their property.

Twelve of 15 Baltimore council members now are backing a resolution that asks state legislators to restrict the sale of liens for debts of less than $750 — triple what’s now allowed under state law. Evicting people over small debts "is simply not in Baltimore's long-term interests," the resolution says.

"It's a terrible thing to lose your home over a water bill — particularly a small water bill. This has been a problem with the tax sale," Councilwoman Belinda Conaway, the measure's chief sponsor, told the Investigative Fund in an interview.

City officials said Valentine’s story, published jointly with The Baltimore Sun, helped spur them to action. She was evicted in February from the west Baltimore home her family had owned for decades after a judge ordered her to pay more than $3,600 in legal fees and other costs—nearly ten times her original debt. Valentine, an unemployed former mental health counselor with four children, admitted she failed to pay the water bill, and later some taxes on the property. But she argued the fees were excessive and she couldn’t afford them.

Valentine told the Investigative Fund that the proposed change in state law would have helped her keep the family home, which she returned to about a decade ago to care for her ailing father who had Alzheimer’s disease. “If it gives someone else a chance that makes me happy,” Valentine said.

Since her eviction, Valentine has been staying with family. She said she had not been able to find a job or an apartment. “I still feel anxious about my situation, but it makes me feel good that my story may prevent others from going through what I have been through,” she said.

The call for action in Baltimore comes about two months after the city held what is believed to be a record tax sale, selling more than 12,000 liens to investors. That's more than twice the number sold in 2006 in the midst of Baltimore's housing bubble, an increase some city officials blamed on the poor economy. About 13 percent of the liens sold in May were for unpaid bills of less than $750, records show.

Lester Davis, a spokesman for Council President Bernard C. "Jack" Young, said he believes the council "will grant serious consideration to Ms. Conaway's bill because of its potential positive impact on Baltimore families."

But a spokesman for Mayor Stephanie Rawlings-Blake said city officials are studying other options, noting that the mayor objects to a plan that would allow homeowners to escape obligations.

"The administration does not support an amnesty for property owners that failed to pay taxes and fees," spokesman Ian Brennan said.

Maryland’s tax sale system has drawn controversy in recent years. The U. S. Justice Department's anti-trust division is investigating bid-rigging by some investors at as many as two dozen of the annual sales in Baltimore and other parts of the state. Three men have pleaded guilty to criminal charges in the probe, including two longtime Baltimore tax-sale investors who made more than $10 million from fees and other costs collected over a six-year period from the owners of more than 6,000 properties.

Yet tax collectors argue that nothing short of threatening foreclosure will compel some people to pay taxes and other municipal bills. Losing that leverage could aggravate budgetary problems in Baltimore and other parts of the state, they argue. That view prevailed in the Maryland General Assembly earlier this year when it failed to pass a bill limiting the sale of liens to under $750 by a single vote.

The other foreclosure menace

Baltimore,Maryland,United States — 2013-01-18T12:11:45-05:00

A version of this story appeared in The Baltimore Sun.

One raw day in early February, Vicki Valentine stood by helplessly as real estate investors snatched her West Baltimore home over what began with an unpaid city water bill of $362.

As snow threatened to fall, she watched a work crew hired by the new owners punch out the lock on her front door. A sheriff’s deputy was on the scene while Valentine and her teenage son piled whatever they could into a borrowed car.

Running out of time, Valentine scrambled topack up clothing and mementos. The home had been her family’s for nearly three decades, and her father had paid off the mortgage in 1984. “It’s hard to say goodbye to this house,” she said. “It’s like someone forcing you out of something that belongs to you. I don’t get it.”

Valentine lost the two-story brick row home after the city sold her debt to investors through a contentious and byzantine legal process called a “tax sale.” This little-known type of foreclosure can enrich investors as growing numbers of property owners struggle to pay their bills.

These foreclosed homeowners are not the families making headlines for taking on mortgages they could ill afford. Families ensnared in the tax sale sometimes are unable to overcome relatively small debts owed to local tax collectors.

Rather than collect the overdue money they are owed, many local governments are selling tax liens. Buyers range from behemoths such as JPMorgan Chase & Co, and some regional banks and law firms, to small-fry investors lured by late-night television commercials promising quick riches. Investors generally bid in an auction for the right to collect delinquent taxes and other municipal debts on property owners, sometimes by paying only a few hundred dollars. When owners can’t pay, investors can pick up property at bargain prices.

It can be a good deal for everyone except the property owner. Selling the debts to investors can help governments efficiently ease budget woes without having the added expenses of debt collection, foreclosing and being a landlord.

Investors, meanwhile, can rake in hefty profits. That’s because they can tack on fees and steep interest rates, which can amount to 18 percent annually in Baltimore.

In Valentine’s case, legal fees and other charges climbed past $3,600 — nearly 10 times her original bill.

Investors purchased an estimated $30 billion of real estate tax debt held by governments across the country in 2009, double the amount a year earlier, according to the Florida-based National Tax Lien Association. Altogether, 29 states and the District of Columbia can sell tax lien debt to investors.

Lien sales in Baltimore have nearly doubled since the housing bubble of 2006. On Monday, the city sold 12,689 liens — a probable record. Properties ranged from boarded-up shells and vacant lots to row homes in gentrified neighborhoods and some commercial buildings.

City records show that one in five of these liens on properties is for unpaid taxes or other municipal bills amounting to $1,000 or less. If Baltimore’s 2009 tax sale is any indication, hundreds will stem from delinquent water bills; there were 666 such liens last year.

Although the brisk tax lien trade thrives beneath the radar, largely unnoticed, it has occasionally drawn scrutiny from law enforcement authorities.

Some of Maryland’s most prominent tax sale investors have been swept up in a criminal investigation into bid rigging at the sales. Federal prosecutors allege that those investors agreed in advance which properties to bid at some auctions, improperly reducing the money earned bymunicipalities.

So far, Justice Department prosecutors have secured three convictions in the ongoing investigation. At a May 4 sentencing hearing for two of the defendants, a witness for the government was lawyer John Reiff, part-owner of the company that currently owns Valentine’s lien. He was not charged in the case.

Investing in liens can be risky, with profit on a particular property anything but certain. Investors generally compensate for such uncertainty by buying in large volumes, sometimes at a clip of thousands of liens each year.

Two of the investors who pleaded guilty in the bid rigging case made at least $10 million from fees and other costs collected from owners of some 6,000 property liens they bought over six years, according to federal prosecutors.

Prosecutors said in court filings they suspect bid-rigging occurs in other areas of the country. A JPMorgan subsidiary called Xspand and at least two other companies received grand jury subpoenas last year as part of a Justice Department anti-trust investigation in New Jersey, according to Bloomberg.

‘Unintended Consequences’

Some state lawmakers have questioned the fairness of the tax sale foreclosure process, which often sticks homeowners with thousands of dollars in legal fees and other costs. But cities and counties in Maryland earlier this year fended off an effort to keep water bills out of the tax sale, arguing that without the threat of losing homes many people would fail to pay their bills.

Revenue collectors defend their tax sales as a necessary, if sometimes distasteful, means for feeding the public treasury. In aging cities such as Baltimore, there’s also hope that new owners will rehab decaying or abandoned properties, restoring them to the tax rolls.

Investors say they aren’t the bad guys — they’re providing a service that helps plug holes in municipal budgets. Homeowners should face consequences for failing to pay their bills, they argue, noting that people faced with losing property have many opportunities to redeem it. The mounting fees, they say, reflect the costs involved in navigating complex legal requirements, tracking down property owners and taking them to court to enforce the liens. In Valentine’s case, they noted, a judge approved the fees.

“We are essentially the city’s bill collector,” said lawyer and tax lien investor Reiff.

Critics of tax sales question the morality of government tax collectors acting to enrich private investors at the expense of property owners with low incomes or facing hard times. They ask whether it's the best way to compel people to honor their debts — especially involving relatively paltry public utility bills.

After all, when water bills go unpaid, some cities and counties simply shut off service. In Baltimore, officials often leave it on. Another alternative would be to have private collection agencies track down debtors.

“This is a case where good intentions have led to severe unintended consequences,” said Debra Gardner, of the Public Justice Center in Baltimore, a non-profit advocacy group for minorities and the poor.

Asked about Valentine’s story, David Vladeck, director the Federal Trade Commission's Bureau of Consumer Protection in Washington, said it was “just horrifying to me."

While noting that his comments did not reflect agency policy, Vladeck said he believed more recession-wracked homeowners across the country could face a similar plight. “It’s beyond tragic that this poor woman lost her home.”

Pleas – and More Fees

Valentine was incredulous when the price to keep her property shot past $3,600. Jobless and lacking the savings to pay, she said she could do little to stave off the day of reckoning.

That day arrived on February 3, when a Baltimore City Sheriff’s Department deputy served her with a court-issued “writ of possession” stripping her claim to the home.

Valentine, a former mental health counselor and rehab specialist with four children, said she moved back to her childhood home about a decade ago to care for her ailing father, Charles L. Turner. A retired brewery worker, he had Alzheimer’s disease.

As his condition worsened, he tended to hide bills from the family. (City records confirm that Turner often fell behind in meeting his obligations during the final years of his life and nearly wound up in the tax sale as early as 2000 over unpaid water bills and property taxes.)

When her father died in 2003, Valentine took over the home and stayed there with her son, Dimitrian, now 17. She said she fell into a serious depression in the wake of her father’s deteriorating health and death, and was unable to work or pay her bills on time. She has worked only sporadically since his death. Though she made partial payments on the water and sewer account in 2006, she acknowledges her failure to pay a bill of $462.28 in full. She went down to city hall and paid $100, but never took care of the balance.

When the deadline passed for paying up, the city added 2005-2006 property taxes of $287.92, interest and city tax-sale processing charges. That brought the total she owed to $710.57, according to city records.

The City of Baltimore washed its hands of Valentine’s debt in May 2006 when it sold the lien to Sunrise Atlantic LLC, an arm of the BankAtlantic in Fort Lauderdale. The Florida bank has bid on tax liens in a range of states, from Florida to Illinois, though it has largely sold off its Maryland lien portfolio and is not implicated in the bid-rigging case. BankAtlantic did not return phone calls seeking comment.

Unlike mortgage foreclosures initiated by banks, there’s no appealing a tax sale debt once it is sold off; a property owner has no option other than to abide by the investors’ terms and pay the fees. The lien holders also have little incentive to be flexible about repayment terms.

Maryland law gives property owners six months to redeem a tax lien with only minimal added costs. But if they don’t pay by then, lien holders can sue to seize the property and stick the homeowner with a slew of fees, including legal bills incurred in taking the matter to court. Sunrise Atlantic filed such a case on Valentine’s home in Baltimore City Circuit Court in December 2006, records show.

More than a year later, the court awarded the property to Sunrise Atlantic.

At that point, Valentine sent a handwritten letter to the court, begging for mercy and more time to repay.

In the letter, dated Feb. 9, 2008, Valentine described being unable to work because of depression and other problems. “For now, this is the roof over my son and my head. I am trying to get the money together to catch up on my delinquent bills.” She added: “Please allow more time to pay all bills connected with the foreclosure of said property.”

But the longer she waited and the more she protested, the more legal fees and other charges she incurred.

In 2008, Baltimore attorney Anthony De Laurentis, who represented Sunrise Atlantic, submitted itemized charges to the court: $305.91 in interest on the lien; a $1,500 bill for responding to Valentine’s requests to cut the fees and other legal work; more than $1,000 in assorted expenses, including $325 for a title search of the property and $79 for photocopies, according to court records.

The price list passed muster with a judge, who on Sept. 19, 2008 ordered that Valentine pay $3,603.41 – or forfeit her property.

She asked for another hearing, which delayed the process for more than a year.

While the case dragged on, the Florida bank started divesting its tax lien certificates from Maryland, eventually transferring the lien on Valentine’s home to a firm called Montego Bay Properties. Part of the firm is owned by a trust set up to benefit members of the family of lawyer De Laurentis. Reiff, one of De Laurentis’ law partners, also owns part of the firm.

In an interview in their Baltimore office, De Laurentis and Reiff said 90 percent or more of property owners eventually pay whatever is necessary to keep their homes.

They said most of the properties they take over are vacant and thus nobody is displaced. They also said they had repeatedly tried to settle the matter with Valentine and showed Investigative Fund reporters a thick file of court papers and other records as well as notes of more than a dozen contacts with her to make arrangements to clear the debt.

“We bent over backwards for her,” Reiff said, adding that his staff had tried for more than two years to “work something out” to no avail.

Feds Say Bids Rigged

Though Valentine had no way of knowing it, some investors rigged the 2006 Baltimore tax sale auction that led to her eviction, federal prosecutors alleged in court.

The roots of that conspiracy run deep, prosecutors said. For years, a handful of Baltimore real estate lawyers and their investment partners quietly dominated Maryland tax sale auctions, with few questions asked about their bidding tactics or collection policies.

That changed after The Baltimore Sun used city records and court filings to report in March 2007 that hundreds of mainly low-income city residents had been kicked out of their homes over small unpaid bills, ranging from water and sewer charges to minor environmental citations. Some people were driven from family property because they couldn’t afford to pay thousands of dollars demanded by lien holders.

The Baltimore newspaper also documented for the first time that while dozens of parties bid in Baltimore tax auctions in 2006 and 2007, just three investment groups had won about two-thirds of the liens.

Prosecutors went on to charge three men with conspiring to rig bids at 21 auctions in Baltimore and four other jurisdictions, including Montgomery and Prince George’s counties in the suburbs of Washington D.C. between 2002 and 2007. All three have since pleaded guilty. No other charges have been filed.

Another investment group involved in the conspiracy was DRT Fund, according to court filings by federal prosecutors. DRT is owned in part by De Laurentis and Reiff. DRT participated in a dozen of the 21 fixed auctions, though not the Baltimore City auction in 2006 in which Valentine’s lien was sold, according to court filings.

The Justice Department filed no charges against DRT, which came forward in the fall of 2007 and “fully and truthfully reported their own wrongdoing and that of their co-conspirators and terminated their part in the conspiracy,” prosecutors wrote in court papers filed last month.

DRT went on to sign an amnesty agreement with the Justice Department that commits it to “pay restitution to any person or entity injured as a result of the bid-rigging activity being reported in which it was a participant,” court records state.

Neither De Laurentis nor Reiff would discuss DRT’s settlement with the Justice Department.

Water Bill Woes

Some lawmakers have tried for years, with modest success, to rein in the tax-sale fees that can steamroll low-income homeowners. Maryland legislators passed a bill in 2008 that raised the minimum lien sold from $100 to $250. But a bill to prohibit cities and counties from selling delinquent water bills to investors failed in the state Senate earlier this year by a single vote.

Legislators also rejected a bill that would have prevented the sale of any lien of less than $750, as happens in some other locales outside of the state.

Both bills failed, lawmakers said, largely due to fierce opposition from tax collectors and officials in Baltimore, which conducts the largest tax sale in the state.

Andrea Mansfield, of the Maryland Association of Counties, testified that the tax sale process provides “a much-needed device to ensure that property owners remit payment for their fair share of taxes and charges connected to public services.”

Eliminating water bills from the tax sales would result in more “deficient accounts,” and lead to “increased rates on citizens who properly pay,” she wrote.

Sen. James Brochin, a Democrat from Baltimore County who co-sponsored the legislation that would have banned the sale of delinquent water bills to investors, vehemently disagrees. “It's just disgusting. It's highway robbery. It's dead wrong. It's immoral," he said.

While city officials publicly defend the practice, he said, in reality “they're humiliated and embarrassed by it. Deep down they know how immoral it is."

Baltimore’s mayor, Stephanie Rawlings-Blake, declined requests for an interview on the topic with the Investigative Fund.

City officials were more talkative earlier this year when they sought to block lawmakers from banning the sale of water bill liens. Mary Pat Fannon, a lobbyist for the mayor’s office, said in prepared testimony for a February 5 hearing that the city had begun offering repayment plans for water bills to help homeowners avoid tax sale.

She said that the 666 water bill liens sold by Baltimore City in 2009 was way down from the 1,129 sold to investors the previous year and credited the repayment plans for the reduction.

And she went further, testifying that nobody had lost a home due to an unpaid water bill from either sale in 2008 or 2009. What Fannon neglected to mention: Because of the lengthy transfer process in the courts, it was too early for those groups of property owners to begin losing their homes. Most tax sale lawsuits have taken longer than two years to resolve through the courts.

Fannon also said that without the tax sale, the city would need to file debt collection lawsuits against each delinquent property owner, which she said “would be very expensive, time consuming and flood the courts.”

Two days before Fannon’s testimony at the state capital, Valentine stood watching as her belongings piled up on the sidewalk in Baltimore.

A Neighborhood’s Decline

More than three years after Valentine’s small debt drew her into the tax sale, neither the city nor the investors seem to have won much.

The property is unlikely to be fixed up any time soon. Instead, it adds to a sense of decay that permeates some parts of urban Baltimore. On Valentine’s old block in the Sandtown neighborhood, all but a handful of houses, abandoned long ago, are boarded up.

Such decline has summoned other ills. “Drugs moved in and replaced the good with the bad,” said Valentine, who is living temporarily with her mother. Many of her possessions are in storage.

De Laurentis and Reiff now hold a “writ of possession” for a property that’s in need of substantial repair. Though the home is assessed at $46,000, in such dilapidated condition the investors said they probably would have trouble selling it for more than $16,000.

In addition, investors could be on the hook for a $7,000 water bill of their own. Just how that happened is unclear; there may have been an undetected leak in Valentine’s home. Last month, the city finally turned off the water.

If the investors take the final step to secure a deed to the property, they would have to pay the city roughly $6,300, which the city is then supposed to turn over to Valentine. The law entitles original property owners to receive at least some compensation.

De Laurentis and Reiff say they’re still willing to work with Valentine to resolve the matter. Reiff said he gave her a key to the new lock so she could have more time to remove her belongings as a good faith gesture.

“We'll definitely work something out with her,” Reiff said.

Consumer complaints soar on mortgage 'rescue' schemes

2011-10-12T20:16:32-04:00

As many Americans sank deeper into financial trouble last year, a record number reported that they fell victim to schemes seeking to profit from their misfortune, according to a federal report released Wednesday.

Complaints data collected by the Federal Trade Commission from several U.S. law enforcement agencies show that distressed homeowners became particularly vulnerable to fraudulent practices by individuals or companies promising financial “rescue.” Companies that, for instance, offer mortgage modifications or foreclosure relief programs generated nearly 8,000 complaints in 2009. Only one such complaint was officially recorded in 2008. The numbers are an indication of a much larger problem, since only a fraction of victims file formal complaints.

“These people are desperate and are unfortunately the perfect target for a scammer who has no conscience and is trying to take the last dollar out of these people’s wallets,” said David Vladeck, the FTC’s director of consumer protection.

The Huffington Post Investigative Fund is documenting these schemes in our ongoing series, Hard Times Profiteers. We are compiling your stories of real estate schemes and your photos of come-ons advertised on roadside signs.

The FTC collected more than 1.3 million complaints of all kinds last year, up from 1.2 million in 2008. Consumers reported losing more than $1.7 billion from fraud and various other schemes, with the largest concentration of complaints coming from Nevada and Colorado.

The complaints were not limited to mortgage swindles. This year, the most commonly reported problem was identity theft.

But as people increasingly lost their jobs and fell behind on mortgage payments last year, some of the most striking spikes in complaints related to credit schemes. Between 2008 and 2009, complaints about companies that offer advance-fee loans and promise to repair bad credit more than doubled to 41,448. “Debt management” and “credit counseling” complaints also doubled.

The FTC, the U.S. Justice Department and state attorneys general have accused — and are prosecuting — dozens of companies for fraudulently using the recession to victimize consumers.

Now the FTC is paying particular attention to mortgage schemes. The sudden leap in consumer complaints is in part attributable to hundreds of “rescue” companies that launched last year after the Obama administration created a government-subsidized loan modification program.

Logistical problems have plagued the administration’s Home Affordable Modification Program, which has produced only 116,000 permanent mortgage modifications. In turn, many homeowners have turned to fly-by-night companies for help, analysts say.

“Fundamentally they’re a product of a broken system,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “As long as people are desperate to save their homes, and don’t have a good alternative, these guys are going to find a way to cheat them.”

Although some businesses offer legitimate loan modification services, the FTC has proposed a new rule that would prohibit companies from charging consumers up-front fees, a move that will probably “drive a lot of these scammers out of this business,” Vladeck said. The agency, which can bring civil but not criminal court cases, has identified about 500 companies that currently charge advance fees.

Through its “Operation Loan Lies,” the agency has sued about 30 companies accused of operating bogus loan modification or foreclosure rescue businesses.

Ultimately, Vladeck hopes these cases will encourage the Justice Department to pursue criminal charges against mortgage schemers.

“I want to shut you down,” Vladeck said of the schemers. “I want to take every penny you have and I want to send you to jail.”

Courts examine credit raters' 'intimate' relationship with bankers

2011-10-12T15:16:30-04:00

Editor’s Note: This is the last of three articles by the Investigative Fund on the credit rating companies.

A decade ago, the nation’s largest credit-rating companies developed a new line of business that boosted their profits and sent them on a hiring spree. They began rating complex investments that featured large packages of bonds sometimes based on subprime mortgages.

Now the raters are reaping the consequences of their embrace of Wall Street’s so-called structured financial products. For one thing, they are facing a flood of about 50 lawsuits — including one filed last month by the state of Ohio — for handing out inflated grades to many such investments that defaulted and cost investors billions of dollars.

But the more ominous development for the raters is that structured finance may have opened a crack in their long-standing shield for warding off investors’ lawsuits — the First Amendment defense.

For years, the companies — Standard & Poor’s, Moody’s and Fitch — have argued that they are analogous to journalists. They say their ratings are independent opinions, protected by the constitutional right to free speech. The defense works: Even when their ratings have turned out to be wrong, as in the collapse of Enron, the companies remain undefeated in court.

Many of those currently suing the credit raters, however, contend that they did not just offer opinions but worked with bankers to help create financial products and then, in effect, graded their own work. The raters “no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” the California Public Employees' Retirement System, known as Calpers, alleges in a lawsuit. Calpers is the largest state pension fund in the country.

Several former rating company employees confirmed in interviews with the Huffington Post Investigative Fund that rating analysts worked closely with financial institutions as they created structured investments. Research documents produced by the raters and obtained by the Investigative Fund, as well as Securities and Exchange Commission reports, also provide a window into the raters’ role in the structuring process.

The lawsuits against the credit raters further allege that the ratings on these products were only distributed to a select audience. As a result, plaintiffs argue, the credit raters cannot receive First Amendment protection and should be forced to compensate investors who trusted their ratings.

This argument recently gained some traction in federal court.

"It's one thing to come in after the fact and say, ‘What a beautiful building.’ But it’s another if they first helped build the building." — Frank Partnoy, former investment banker

In September, a U.S. District Court judge in New York refused to throw out an investor’s lawsuit even in the face of a First Amendment claim. The investor, Washington state’s King County, lost about $100 million on products highly rated by Standard & Poor’s and Moody’s, their lawyers said.

King County’s lawsuit also highlights potential conflicts of interest plaguing the credit-rating business. Since the 1970s, corporations that issue bonds have paid the rating companies for their work. Critics claim this payment arrangement gives the rating companies the incentive to please bond issuers rather than investors.

Structured finance magnified the conflict — and the raters’ bottom line. In its lawsuit, Calpers said that fees for rating structured investments ranged from $300,000 to $1 million per deal — about three times higher than for rating corporate bonds. Consequently, as a 2008 SEC report to Congress pointed out, issuers of structured investments “have the potential to exert greater influence” on a credit rater than a company that issues traditional bonds.

According to the SEC report, the raters generally did not get paid for their work until a structured product was formally offered to investors. And the product often wasn’t offered unless it received a Triple-A rating.

To ensure this top grade was achieved, the rating companies and the bond issuers would be in “constant contact,” Frank Raiter, a former managing director for Standard & Poor’s, said in an interview. The financial institutions “would sit down with a rating analyst and they’d tell you what you need to do to get as many of the senior bonds rated triple-A,” Raiter said.

Occasionally, while profits were soaring, rating officials acknowledged publicly how the system worked. In 2007, Moody’s then-chief operating officer and president Brian Clarkson told a business magazine: "You start with a rating and build a deal around a rating.”

Now under fire, the credit rating companies say their critics are wrong to characterize ordinary discussions about a rating as any kind of collusion.

Floyd Abrams, a renowned First Amendment lawyer who has represented Standard & Poor’s for more than 20 years and has never lost one of their cases, said his clients “don’t structure” financial products.

“But they do engage in an iterative process — a give and take, a discussion with the entities that they’re rating,” Abrams said in an interview.

'Attractive Returns'

One such discussion began in early 2005 for the structured investment where King County and Calpers put their money.

Cheyne Capital Management Ltd., a London-based hedge fund, assembled an estimated $8 billion portfolio of securities, mostly backed by mortgages, to offer to investors. The product was a so-called structured investment vehicle, or SIV. In the last decade, hedge funds and banks popularized the creation of SIVs—spin-off companies that would raise money from investors and use the proceeds to buy securities with more lucrative returns.

Cheyne turned to S&P and Moody’s to rate its SIV, named Cheyne Finance, so it could start selling slices of the package. To attract big investors, the hedge fund wanted the slice that contained the highest-quality — or “senior” — assets to be rated triple-A, according to King County’s lawsuit.

A Standard & Poor’s research document obtained by the Investigative Fund suggests that — a few months before the Cheyne SIV was available to investors — the rating company helped the hedge fund figure out how to qualify for certain ratings.

The document, labeled “presale” and dated May 17, 2005, assigned a “preliminary” triple-A rating to Cheyne’s senior slice. It also described the steps Cheyne would take to maintain sufficient capital on its books, and in turn, its top rating. Keeping a cushion of capital theoretically protects a company from going bust.

“A variety of different scenarios were analyzed to determine the required level of capital for Cheyne Finance,” the document said. “Standard & Poor’s is comfortable that the minimum capital requirements ensure that under the tested scenarios the senior liabilities will be repaid in full.”

S&P also set forth particular “capital adequacy tests” that Cheyne “is subject to.”

The document does not make clear which party designed those tests. A July 2008 SEC report, which was based on in-depth examinations of several rating companies, described in general how the process worked. If a rating company concluded a structured product had insufficient capital to “support the desired ratings,” this conclusion “would be conveyed” to the issuer, who could then adjust the structure “to get the desired highest rating,” the report said.

In the Cheyne deal, discussion was not limited to the highest-rated slice of the SIV. For the lower-rated parts, Cheyne “will use the methodology described” by Standard & Poor’s, the presale document said.

S&P declined to discuss the document, citing ongoing litigation involving the Cheyne case.

Before Cheyne was even available for purchase, potential investors received the presale document as well as a prospectus advertising the unofficial ratings. The credit raters also had telephone conferences with Cheyne’s issuers “to help draft the language” in the prospectuses, according to the Calpers lawsuit.

The prospectuses made Cheyne’s SIV appear ideal for pension funds and other large groups hoping to protect their nest eggs. In one prospectus, Cheyne was pitched as “ground breaking”; the “First SIV to achieve two public ratings” on its lower-quality slices. Another advertisement, circulated in spring 2005 before the SIV became available, promised “attractive returns.” On a slice rated triple-B by S&P, the document predicted “hypothetical returns” of about 5 percent for the first couple years.

King County was sold on the deal. In 2007, the county invested about $50 million of a $4 billion fund that manages, among other things, school lunch programs. “They wanted the least risky space they could find,” said Patrick Daniels, an attorney for the county. Calpers invested $1.3 billion of its nearly $200 billion fund in three SIVs, including Cheyne.

'Oasis of Calm'

Within months, the housing market began to implode. Yet the credit raters assured investors that the ripples from the subprime mortgage collapse were not reaching Cheyne and other SIVs.

On July 20, 2007 — 10 days after it downgraded $5.2 billion worth of investments backed by subprime mortgages — Moody’s published a report titled “SIVs: An Oasis of Calm in the Subprime Maelstrom.”

The ”inherent diversity” of SIVs and their focus on highly-rated assets led Moody’s to expect SIV ratings “to remain stable.”

On Aug 15, 2007, S&P issued a similar report that said SIVs were “weathering the current market.”

Two weeks later, Cheyne’s issuers sent S&P and Moody’s a letter saying it was winding down the SIV because it was no longer meeting capital requirements. S&P quickly downgraded Cheyne’s rating.

Moody’s, on the other hand, put it on “review” for a “possible downgrade” but didn’t reduce some ratings to “junk” status until July 2008, Calpers alleged in its lawsuit.

Spokesmen for Moody’s and S&P argue that the reports are examples of their many well-researched publications on market trends and were not meant to encourage anyone to invest in SIVs.

Moody’s and S&P say that, for transparency’s sake, their general methods for grading structured products are publicly available online. But in some structured deals, their specific rating methods were not as transparent as the raters suggest. The July 2008 SEC report said: “Significant aspects of the ratings process were not always disclosed.”

The raters also say that any detailed discussions they hold with issuers are akin to a teacher providing students with grading criteria. Issuers are free to disagree with the raters’ opinions and take their business elsewhere.

Gary Witt, a former managing director for Moody’s, explained that as banks tinkered with their structured products, they would regularly seek feedback from the raters. The raters would evaluate the investments, and if necessary, explain why it didn’t qualify for a high rating.

“Because of the complexity of deals being done, and because the deals are changing a lot over the course of several weeks, a detailed back-and-forth was necessary,” said Witt, now a professor at Temple University.

However, Witt said he believes that SEC should step in to change the relationship. The agency, he said, could prohibit banks or hedge funds from advertising their preliminary ratings in prospectuses.

“The SEC should do away with this,” he said. “Then there wouldn’t be so much pressure to have this detailed back-and-forth.”

A Moody’s spokesman declined to comment for this article. Fitch did not respond to a request for comment.

'Intimately Involved'

In the most recent lawsuit filed against the raters, Ohio’s Attorney General accused the companies of being “intimately involved in structuring” investments that caused retirement funds for police officers, firefighters and teachers to lose $457 million.

Because the raters’ “fingerprints are all over” the investment documents, “the free speech claim is on much less sturdy grounds,” said Frank Partnoy, a former investment banker and current professor at the University of San Diego Law School.

“It’s one thing to come in after the fact and say, ‘What a beautiful building.’ But it’s another if they first helped build the building,” said Partnoy, who also is an expert consultant for the government, defense attorneys and plaintiffs, including investors who sue the raters.

In the King County case, U.S. District Court Judge Shira Scheindlin threw another potential wrench in the raters’ First Amendment defense. While tossing out almost all of the county’s claims, she said she was rejecting the raters’ request to dismiss the case on free speech grounds because Cheyne Finance’s ratings allegedly “were never widely disseminated” and were offered instead “to a select group of investors.”

A Moody’s spokesman disputes that allegation, noting that Cheyne’s ratings are published on the company’s Web site. But a check of the Web site shows that those ratings are inaccessible without a paid subscription.

Abrams, the Standard & Poor’s attorney, said he doubts Scheindlin’s ruling will be “truly harmful.”

“This case is atypical,” Abrams said, noting how Scheindlin reaffirmed that “under typical circumstances, the First Amendment protects rating agencies.”

But Todd Seaver, an attorney for Calpers, said he was encouraged by Scheindlin’s ruling. He said while it is arguable whether some ratings should be entitled to free-speech protections, when it comes to structured finance, the rating companies “are basically whispering in the ear of a select few people.”

This allegation poses the greatest threat to the raters’ free-speech protections, said Eric Talley, a professor at the University of California-Berkeley law school and a specialist in the credit-rating industry.

“If I got a case in front of me that says the ratings had a small dissemination,” Talley said, “I start to think, ‘Exactly what are the democratic ideals that we need to protect here?’ It doesn’t strike me as a place where we need constitutional protections.”

Maria Zilberman contributed research for this report.

How credit raters fended off oversight from Congress and SEC

2011-10-12T14:16:45-04:00

Editor’s Note: This is the second of three articles by the Investigative Fund on the credit rating companies. Read the others here and here.

When the nation’s top credit rating companies came under attack in Washington in recent years, Charles E. Schumer often emerged as their strongest ally.

As recently as 2006, the senior senator from New York questioned whether new oversight legislation was necessary given that the companies, “located in the great city of New York,” were already “making good-faith efforts to improve the transparency of their ratings.” At a Senate hearing that spring, he encouraged the chairman of the Securities and Exchange Commission not to ignore the raters’ central argument against government interference — that their ratings of bonds are just opinions, protected by the First Amendment.

But a year later, as the nation reeled from an economic meltdown, the Democratic senator changed his mind. He lashed out at the companies for awarding top grades to bonds comprised of high-risk mortgages. When the bonds defaulted, investors lost billions.

“My particular bugaboo here are the credit agencies,” Schumer told a press conference in December 2007. “The investors who bought this can't be expected to know all the nooks and crannies.”

Schumer’s turnabout is at once a symbol of the credit rating industry’s past success on Capitol Hill and its more precarious future. Some of the same politicians who used to go to bat for the companies are supporting bills in the House and Senate that would mandate stricter oversight.

Yet passage of either bill is far from assured, and in the meantime the three big raters — Standard & Poor’s, Moody’s and Fitch — are spending record amounts to lobby lawmakers and regulators.

For years, the credit raters have stated that they are open to stronger supervision from Congress and the SEC. But behind the scenes they repeatedly have quashed or watered down potential government rules by arguing that, much like a newspaper editorial, ratings are protected by the constitutional right to free speech, according to a Huffington Post Investigative Fund review of congressional testimony, SEC documents and lobbying reports.

The companies say they gather facts to form educated opinions about the safety of bonds. Ratings are not, the companies say, guarantees that the bonds will or will not default.

So far the courts have agreed with the credit raters, but some specialists in constitutional and securities law find fault with the argument that a bond rater is akin to a journalist.

“To the extent that they are successful in claiming protections under the First Amendment, this could have rather dangerous consequences and seriously undermine the sense of transparency in the U.S. capital markets,” said Michael Siebecker, a University of Florida law professor and former arbitrator for the National Association of Securities Dealers.

Pushing Back the SEC

Investors rely on credit rating companies to be their eyes and ears in the bond markets.

The companies have been around for a century, growing increasingly important to the U.S. and global financial systems. When corporations, banks or local governments want to borrow money from investors, they issue debt in the form of bonds. The rating companies determine the likelihood of default by assigning bonds a letter grade — ranging from the safest triple-A to the “junk” bond status of C or lower.

Until the 1970s, the raters charged investors for their work. Then they shifted, assigning fees to the corporations that issue the bonds. Critics have claimed that the switch caused an inherent conflict of interest, giving the rating companies the incentive to please the bond issuers rather than the investors.

The idea that the companies needed more accountability gained traction at the SEC in the mid-1990s. But nearly every time the SEC has proposed credit rating regulation over the last 15 years, the companies have filed comments with the commission invoking the First Amendment defense, records show. In response, the SEC has often either abandoned or modified its attempts.

In 1997, when the SEC aimed to define the job of a credit rating agency, the general counsel for Moody’s filed a comment objecting that among other things new regulation would “Erode the First Amendment rights of all publishers of credit opinion.” The SEC eventually abandoned the plan.

In 2000, the SEC was pondering a crackdown on insider trading. If financial players selectively disclosed information to an interested party, the SEC wanted them to share the information publicly.

Moody’s spoke up and asked for an exemption for the credit raters. “The rating agency's role is analogous to that of a newspaper or magazine publisher, not to the role of a legal or financial advisor,” the company’s vice president said in a comment filed with the SEC.

The SEC approved the rule — and the exemption for rating companies.

‘On a Pedestal’

In the wake of the Enron scandal, the raters finally braced for a change. The companies had left high grades on Enron’s bonds just four days before it filed for bankruptcy in 2001.

At an SEC hearing in 2002, the commission's chief economist challenged the rating companies to voluntarily drop their free-speech claims. Leo C. O'Neill, then president of S&P, declined. “I don't think that we should be asked to waive our rights under the First Amendment,” he said.

No new rules arose from the hearings.

In 2003, the SEC did float the idea of having its staff inspect the companies’ rating procedures. O’Neill again rebuffed the SEC, this time in a comment filed with the commission. The plan “would likely run afoul of fundamental First Amendment principles,” his comment said.

The SEC’s plan never materialized.

Failing to impose rules on the credit raters, the SEC instead turned to a voluntary oversight plan. Jerome Fons, a Moody’s managing director, recalled in a recent interview that he was on vacation in March 2004 when the SEC called to pitch the idea.

Fons jumped at the plan, he said, and his bosses were receptive. “We thought it was great,” Fons said. The voluntary plan balanced the First Amendment protections with concerns that the companies were unregulated, Fons said.

Eventually, though, the credit raters learned that as part of the plan the SEC’s enforcement officers wanted access to some of their records. “That’s when the lawyers said, ‘No, that’s not going to happen,’” said Fons, who now consults on credit issues.

In an interview, Richard Y. Roberts, who was an SEC commissioner from 1990 to 1995, said the SEC “put the rating agencies on a pedestal.”

Roberts said he first warned the commission 15 years ago about the danger of lax oversight. “They did not use the authority they had, even though it wasn’t much,” he said.

An SEC spokesman declined to discuss decisions made under past SEC chairmen or the commission’s current regulatory proposals.

’That Would Be Pleasant’

On the wall of his Langhorne, Pa., law office, former congressman Michael Fitzpatrick hangs a framed copy of the bill that he had hoped would rein in the rating companies. It reminds him of both a legislative victory and a lost opportunity.

In 2005, as a freshman Republican on Capitol Hill, Fitzpatrick was alarmed that the rating companies were players in virtually every recent financial mishap yet had little oversight from the SEC.

“We believed that the rating agencies had consistently failed to perform their basic mission, which is to provide timely and accurate ratings,” he said. Meanwhile, the companies were enjoying record profits in 2005. Moody’s saw net income of $560 million and Standard & Poor’s reported $1 billion, including earnings from its S&P stock index.

So Fitzpatrick proposed a bill to allow the SEC to “take action against” the companies if they issued ratings that violated their own internal procedures. He met resistance. At a 2005 hearing, Rep. Paul E. Kanjorski (D-Pa.,) warned that Congress must be “very sensitive to the First Amendment issue posed in these debates.”

The legislation nonetheless passed the House in 2006, the first time either chamber of Congress had approved new oversight of the raters. (Kanjorski was one of the 165 Democrats who voted against Fitzpatrick’s bill. Kanjorski is now chairman of the House subcommittee on capital markets and the author of the pending credit rating oversight legislation.)

When the Senate took up Fitzpatrick’s measure, the rating companies brandished the free-speech defense. Standard & Poor’s submitted a memo to Congress that said the bill had “fatal constitutional defects.”

“Courts have repeatedly held that rating agencies are entitled to similar constitutional protections as, say, The Wall Street Journal or BusinessWeek,” Vickie Tillman, then executive vice president of Standard & Poor’s, told a Senate committee in March 2006. “This is so because the activities of rating agencies are fundamentally journalistic.”

At another Senate hearing in April 2006, Schumer, the New York Democrat, questioned then-SEC Chairman Christopher Cox about showing “sensitivity” to the companies’ First Amendment rights. Without those rights, Schumer said, investors might “threaten to sue” the rating companies or “bamboozle them, push them around.”

Schumer encouraged Cox to revive the voluntary oversight plan. "You might come up with something that makes everybody happy, and we won't have to legislate,” Schumer told Cox.

"That would be pleasant all around," Cox responded.

Schumer agreed: "Yes, it would,” adding that the companies still “need to be strictly regulated.”

Weakening the Bill

Despite Schumer’s efforts, Fitzpatrick’s bill advanced. But it carried an amendment — which records show was introduced by Sen. Mitch McConnell (R-Ky.) — forbidding the SEC from regulating “the substance of credit ratings or the procedures and methodologies.”

That echoed language in the Standard & Poor’s memo previously submitted to Congress, which had warned that SEC regulation of rating “procedures and methodologies” would “affect the substance of those ratings.”

The Senate’s amendment also parroted Schumer’s words at a hearing the year before: “The regulation of these entities should not mean dictating the content of their businesses.” The bill passed and was signed by President Bush in September 2006.

Fitzpatrick, who lost his seat in the 2006 midterm election, blames Schumer for weakening the law. “Mr. Schumer from New York became involved with doing their bidding,” he said. “A bill was passed that was much less reforming than what I shepherded in.”

In 2007, following the dictates of the new legislation, the SEC adopted rules requiring the companies to publicly disclose their rating methodologies, performance of their ratings and potential conflicts of interest. The SEC also aimed to prohibit credit raters from the “coercive or abusive” practice of slashing a company’s bond rating when the company refuses to buy additional ratings.

Schumer again intervened.

He and three other senators — Michael Enzi, a Wyoming Republican; John Sununu, a New Hampshire Republican; and Robert Menendez, Democrat of New Jersey — wrote Cox a letter in May 2007 to “express our concern” over the plan. The senators reminded Cox that the 2006 law required the SEC to enforce “narrowly tailored” regulations.

Four months later, it was clear the housing bubble was bursting, and the raters were vilified for misjudging mortgage-backed bonds. Schumer did an about-face. He announced at a September 2007 Senate hearing: “I will tell all of the representatives of [rating] companies that I have worked with and defended in the past — they're good New York companies — to say nothing went wrong, that ain't going to fly.”

He also has urged the SEC to sanction Moody’s if the commission verified allegations that the firm issued inflated ratings and covered up the error.

Asked to comment on the senator’s change in position about the rating companies, Schumer’s spokesman, Brian Fallon, said in an e-mail that the rating companies “treated their ratings as negotiable to please their clients, and ended up as one of the main culprits behind the economic crisis. As a result, Senator Schumer has been one of the lead proponents in Congress for drastically overhauling this industry’s business model in order to root out inherent conflicts of interest once and for all.”

Turning to Lobbyists

In the wake of the financial crisis, the credit raters say they have tightened internal controls and made it harder for products such as mortgage-backed bonds to receive rosy ratings.

All three big raters also have filed comments with the SEC encouraging some additional regulation. In September, the SEC approved rules that require the companies to make public all of their ratings, beginning with those issued in 2007.

Floyd Abrams, the renowned First Amendment lawyer who has defended Standard & Poor’s for more than 20 years, said that the SEC already has “significant oversight powers.” He said that another check on the companies is the market itself, because if the ratings aren’t credible the companies won’t be able to sell them.

Still, Abrams said, “I think that, in light of the events of recent years, more regulation by the commission is in the interest not only of the public but of the rating agencies.”

Moody's and Fitch declined to comment for this article.

Some aspects of Kanjorski's bill, now making its way through the House, concern the credit raters. They object, in particular, to a provision that would allow investors to sue the companies if it later turned out that they had failed to follow their own internal rules in assigning a rating.

Even stronger provisions emerged in the Senate on Tuesday, when Democrat Christopher Dodd of Connecticut unveiled his financial reform plan. Dodd’s plan would make it easier for investors to sue the credit rating companies if they could show the raters "knowingly or recklessly" failed to fully investigate a bond.

Facing the new pressure from Congress, the credit raters have stepped up their lobbying. In the first nine months of 2009, records show, the companies collectively spent almost $2.7 million, already $180,000 more than they spent in all of 2008 and the most they have ever spent in a year. Of the big three raters, Standard & Poor’s has spent the most so far this year on lobbying — about $1.5 million — though that amount includes some lobbying for its parent company, McGraw Hill. Standard & Poor’s lobbyists also have cast the widest net — taking their case to the White House, SEC, FDIC, Federal Reserve and Treasury Department, records show.

Recently joining the company’s campaign is the influential Podesta Group and its owner, Tony Podesta. His brother, John Podesta, was co-chairman of President Obama’s transition committee. The Podesta group also has Israel Klein, Schumer’s former communications director, lobbying for the rating company.

An S&P spokesman noted that the rating industry’s lobbying expenses are paltry relative to that of banks and other financial players.

Moody’s has spent $820,000 this year on lobbyists that include former Sen. Lauch Faircloth (R-N.C,) and former Rep. Vic Fazio (D-Calif.) The company also has hired a new lawyer--constitutional heavyweight and Harvard professor Laurence Tribe. Tribe was a law-school mentor to then-student Barack Obama and later became an adviser to Obama’s presidential campaign.

Tribe recently wrote a white paper for Moody’s about the rating companies and the First Amendment, which the company offered to share with Kanjorski. Moody’s declined to release the white paper to the Investigative Fund.

Maria Zilberman and Rachel Leven contributed research to this report.

Under attack, credit raters turn to the First Amendment

2011-10-12T13:35:49-04:00

Editor’s Note: This is the second of three articles by the Investigative Fund on the credit rating companies. Read the others here and here.

For two decades, the nation’s top credit rating agencies have managed to fend off a crackdown from Washington by relying on a surprising ally – the First Amendment.

Despite their key role in the most recent economic calamity, the three big bond raters—Standard & Poor’s, Moody’s and Fitch—seem poised to do it again. With help from two of the most storied constitutional lawyers in the country, the raters have successfully argued that when they make a mistake -- say, awarding the top triple-A grade to a multibillion-dollar bundle of bonds that later default -- they cannot be sued or held accountable.

That’s because ratings are opinions, the agencies claim, protected by the constitutional right to free speech.

A Huffington Post Investigative Fund examination of court filings, congressional testimony and Securities and Exchange Commission documents illustrates how the companies have repeatedly invoked that right to free speech to dodge government regulation and court action. The raters have never lost a courtroom battle to a disgruntled investor, not even in the Enron scandal. Enron enjoyed high grades on its bonds just four days before it filed for bankruptcy in 2001.

Critics of the rating companies argue that they are misusing the Bill of Rights to protect a flawed but highly profitable business.

Frank Partnoy, who used to design investment products while working for Morgan Stanley, said that given the success of the First Amendment defense, it is not surprising the companies have published “unreasonably high” ratings. “Rating agencies have had a free go at it under a cloak of the First Amendment,” said Partnoy, now a professor at the University of San Diego Law School.

But Floyd Abrams, the renowned First Amendment lawyer who has represented Standard and Poor’s for more than 20 years, said the rating companies are entitled to the same free-speech protections afforded to journalists.

“It’s an opinion,” Abrams said. He acknowledged: “It may not be a great opinion if, when you look back on it, you say, ‘you gave it triple-A, how could you do this?’”

To be sure, there have been some small cracks in the credit raters’ defenses given the magnitude of the current financial crisis. Last month, a federal judge in New York declined to dismiss an investor’s lawsuit even in the face of a First Amendment claim.

And on Wednesday, the House Financial Services Committee approved the latest bill designed to rein in the agencies. But after hearing testimony last month from the raters’ lawyers and executives, the committee backed off a plan to make the companies collectively liable for mistakes in each others’ ratings.

Partnoy said he expects lawmakers to water down most attempts at tightening regulation of the business.

“I’ve watched the rating agencies be recklessly wrong, over and over again, and I’ve seen them get nothing more than a slap on the wrist,” said Partnoy, who is also an expert consultant for the government, defense attorneys and plaintiffs, including investors who sue the raters. “Anytime you can hold up the Constitution, it’s going to get people’s attention.”

'The Safest Possible Place’

Credit raters are entrenched in the U.S. financial system.

When banks, corporations or city governments want to raise money, they issue debt in the form of bonds for investors to purchase. The rating companies judge the quality of the bonds. Ratings can range from the highly-coveted triple-A to the “junk” bond status of C or lower.

For several decades, until the early 1970s, the big three raters charged investors for ratings. Then the rating companies started charging the banks and companies that issue the bonds. That payment arrangement, critics argue, creates an inherent conflict of interest, where the agencies serve the issuers rather than the investors who rely on the ratings.

King County in Washington state relied on ratings and lost between $70 and $100 million from a several-billion dollar fund that manages, among other things, school lunch programs, according to the county’s lawyers. Along with the Abu Dhabi Commercial Bank, the county filed a lawsuit against S&P and Moody’s alleging that they used “flawed” assumptions to issue “false and misleading” ratings.

Some of the investments King County made were rated triple-A, its suit alleges, leading the county to believe it was making conservative decisions.

“They were trying to be good fiduciaries and put their money in the safest possible place,” said Patrick Daniels, an attorney for the county.

Despite the top rating, the investment was actually quite risky. The county had bought into structured investment vehicles, which are complex bundles of bonds backed by assets such as mortgages, credit cards and car loans. When the mortgages defaulted, so went the bonds, and ultimately the county’s money.

Another lawsuit brought by the California Public Employees' Retirement System alleges that the fees for rating structured products ranged from $300,000 to $1 million per deal.

Indeed, the rating companies saw their profits peak in 2006 and 2007 while structured products were flourishing. Now that bubble has burst, and the raters’ profits have returned to 2005 levels. But even in a down year like 2008, S&P and Moody’s generated more than $1.7 billion in revenue. Moody’s last year had net income of $457 million while Standard and Poor’s saw operating profits of more than $1 billion, although that total includes earnings from the S&P index.

Fitch is not a publicly traded company so its profits are unknown. Fitch and Moody’s officials declined requests for an interview.

A federal judge in New York last month threw out most of King County’s claims but refused to dismiss the suit altogether. In a rare defeat for the agencies’ First Amendment defense, Judge Shira Scheindlin said in a preliminary ruling that because the county alleged the ratings were not widely published, the companies weren’t entitled to free-speech protections.

‘Part of the Culture’

Some former Moody’s employees believe the rating companies are wrong to claim free-speech protections.

“To my eye, the problem with the First Amendment defense is it seems to shield them from any accountability,” said Jerome Fons, a former managing director for credit quality at Moody’s.

Eric Kolchinsky, a former Moody’s managing director turned critic of the company, said that the First Amendment defense enabled some Moody’s analysts to adopt a laissez faire attitude toward the quality of ratings. “Some people almost didn’t even care because they feel it’s just an opinion,” said Kolchinsky, who is also a lawyer. “It’s part of the culture there.”

Kolchinsky added, however, that he believes the raters’ First Amendment protections should not be lifted entirely.

Egan-Jones Rating Co. is a smaller competitor of the big three that sells its ratings to investors instead of bond issuers to avoid a conflict of interest. Sean Egan, the company’s managing director, believes that rating companies should be entitled to some free-speech protections because “it’s legitimate to make mistakes.” But when bond issuers pay for ratings, Egan said, “there’s a clear bias” and the “potential liability should increase.”

Floyd Abrams is joined in his defense of the companies by Laurence Tribe, a longtime Harvard Law professor who was hired by Moody’s in June. He was a law-school mentor to then-student Barack Obama and later became an adviser to Obama’s presidential campaign.

In an interview with the Investigative Fund, Abrams said that credit ratings are educated opinions about the quality of bonds, not guarantees that the bonds will or will not default.“Is it an opinion based upon a level of expert knowledge and analysis? I hope so,” Abrams said. “That certainly is what rating agencies try to be and try to do.”

The First Amendment protects other opinions, such as newspaper editorials, so why not credit ratings, he argues.

Abrams noted that there are some limitations to the First Amendment defense. It cannot shield the raters from fraud, he said. And even with free-speech protections, Abrams said the agencies still face some accountability for their ratings.

“We’ve got lots of lawsuits.” About forty to be more exact, he said.

‘Believe It When I See It’

Investors are also looking to Congress and the SEC to hold the rating companies accountable.

But nearly every time the SEC has broached the idea of rating agency reform, the companies have filed comments with the commission invoking the First Amendment, records show. In the face of these claims, the SEC has often either abandoned or modified some of its attempts at regulation. The rating companies said they have tightened internal controls in response to criticism and remain open to some government oversight.

More recently, the commission enacted some rating agency regulations to increase competition among the agencies and require them to disclose their conflicts of interest. The commission also approved rules this month that will require agencies to disclose a history of their ratings. It’s now discussing a plan to expose the rating companies to greater liability in certain situations.

But Congress has prevented the SEC from changing the rating companies’ methodologies. Abrams and agency executives have flocked to Capitol Hill in recent years to remind lawmakers that those methodologies are protected by the First Amendment, congressional testimony shows.

Rep. Paul Kanjorski (D-Pa.), a member of the House Financial Services Committee, proposed a draft bill last month that would have required the companies to share liability when one violates securities laws. The committee approved a modified proposal Wednesday, by a 49-14 vote, without such a provision. The bill would instead make it easier for investors to sue the companies if they fail to follow their own rating methods, a feature sure to attract opposition from the companies as it hits the House floor and the Senate.

Partnoy, the law professor, said he doubts Congress will allow much to change.

“I’ll believe it when I see it,” he said. “The agencies are on their own, against common sense and public opinion, and yet they continue to win.”

Maria Zilberman and Rachel Leven contributed research for this report.

Top derivatives regulator: 'We haven’t filled the gaps'

2011-10-12T13:01:41-04:00

Gary Gensler, the top regulator of the commodities markets, sees the U.S. financial system still “vulnerable” to the murky world of privately negotiated derivatives.

As chairman of the U.S. Commodities Futures Trading Commission (CFTC), Gensler wants to comprehensively oversee the trading of these complex financial contracts for the first time.

While some forms of derivatives are traded on regulated exchanges, federal regulators including Gensler, who was appointed by President Obama in December, have almost no power over derivatives that are traded privately on the phone or electronically. This over-the-counter derivatives market, which internationally is valued at nearly $600 trillion, is blamed for compounding the current financial crisis.

“We stay particularly vulnerable because we haven’t filled the [regulatory] gaps,” Gensler told the Huffington Post Investigative Fund in an interview this week.

Although derivatives are intended to hedge risk or act like insurance on an underlying asset, they also can be used to speculate on prices. Credit default swap derivatives, some of which insured toxic mortgage-backed securities, drove the financial tailspin of the insurance giant AIG.

Since last year’s calamity, the nation’s five largest commercial banks have become even more exposed to derivatives, to the tune of almost $200 trillion, according to a recent report by the U.S. Comptroller of the Currency. Those five banks — JPMorgan Chase, Goldman, Bank of America, Citibank and Wells Fargo — hold about 97 percent of all derivatives in the U.S. banking industry, the report said.

The agency that Gensler heads was created in 1974, primarily to oversee futures contracts based on commodities such as wheat or oranges. When the instruments expanded beyond commodities, the CFTC lacked the authority and staff to intervene.

Gensler now wants that authority, although his agency is hard-pressed to meet its demands. CFTC staff remains at 580, the same number the agency had at its inception. The CFTC computer system that oversees markets also is outdated.

“We don’t have enough people to oversee the 200,000 transactions that happen every day in this marketplace,” he said in the interview.

Gensler, 51, wasn’t always so gung-ho about derivatives oversight. When he was an assistant treasury secretary in the Clinton administration, Gensler helped design the very law that prevents the CFTC from regulating over-the-counter derivatives.

Before joining Treasury in 1997, he had an 18-year career at Goldman Sachs, where he was a partner. He later was a senior advisor to Sen. Paul Sarbanes (D-MD), then-chairman of the Senate Banking Committee, while the post-Enron corporate responsibility and accounting reform known as the Sarbanes-Oxley Act was crafted. Gensler also was an adviser to Hillary Clinton’s presidential campaign and later Obama’s.

Gensler has now become one of the strongest voices calling for derivatives regulation. Perhaps even more than Obama.

Less than a week after Obama unveiled a plan for derivatives regulation, Gensler sent his own recommendations to Congress. He added 20 pages of regulations intended to “improve” Obama’s plan.

The highlights of Obama’s plan include requirements for standardized derivatives to be traded on a regulated exchange or similar facility and to pass through clearinghouses that serve as a backstop if one party defaults. The plan also mandates increased capital and margin requirements for those trading more customized or non-standardized derivatives and increased transparency of all derivatives by making public some trading details.

Gensler identified several loopholes in Obama’s plan, noting that it would exclude foreign exchange swaps from regulation, possibly encouraging swap dealers to tailor products to fit this foreign exclusion.

“These exceptions could swallow up the regulation,” Gensler said in his package to Congress.

At a House Financial Services Committee hearing today, Gensler was vocal about gaps in the committee’s derivatives regulation bill, which is widely regarded as being looser than either Obama or Gensler’s plan.

The committee is expected to vote on the bill next week.

Top derivatives regulator: 'We haven't filled the gaps'

2011-10-12T13:01:41-04:00

Gary Gensler, the top regulator of the commodities markets, sees the U.S. financial system still vulnerable to the murky world of privately negotiated derivatives.

Anatomy of an attack ad

2011-10-12T11:57:00-04:00

Standing in a medical exam room, a neurosurgeon in a white lab coat stares solemnly into the camera and warns that President Obama’s health care plan “will hurt our seniors” and “end Medicare as we know it.” Two networks, NBC and ABC, declined to run the 30-second ad, but it has probably reached millions of people on Fox, CBS and local stations as well as on the Web.

How this ad – one of dozens of health care spots making the rounds -- came to be produced and distributed provides a case study in modern American political advocacy. It shows how a quickly assembled group with uncertain origins and funding can make a mark on one of the most contentious public policy debates in memory.

The group that says it paid for the campaign – the League of American Voters – incorporated less than two weeks before the ad was released online. The League’s executive director, its only employee, declined to identify its founders or donors but claims that in less than two months of existence it has built a membership of 16,000 and raised about $1.7 million in donations. The group says it rents space inside a downtown Washington, D.C., office, an address shared with at least four other conservative groups.

Interviews and a review of public records show that a wide-ranging group of people coalesced to launch the League or its ad campaign: Dick Morris, a former aide to President Bill Clinton and one of the nation’s more flamboyant political operatives; a one-time West Virginia political candidate; a New York City public relations executive with ties to health care groups; a New York rabbi; a filmmaker best known for an ad questioning the patriotism of Vietnam War veteran and then-Georgia senator Max Cleland; and a Florida doctor who once settled a state medical board allegation that he had operated on the wrong site during a spinal procedure.

‘Lean’ Operation

From the start, it was clear that Morris had a strong hand in the video titled “Protect American Healthcare.” The spot debuted on Morris’ YouTube site on Aug. 3. That day, Morris appeared on Sean Hannity’s Fox News program and talked up the ad, saying he had created it with what he called the “American League of Voters.”

In his long career as a political consultant, Morris is perhaps best known for being chief political advisor to President Clinton, a post he resigned in the wake of news reports that he let a prostitute listen to his conversations with the White House. In recent months, the health care debate has helped raise Morris’ profile in Washington again and propelled his latest book, “Catastrophe,” onto the best-seller list.

Morris has been moving easily between roles as activist and journalist-commentator on the health care issue. He explained to Hannity his strategy for stoking opposition to Obama’s reform plan: “If senior citizens are united in their opposition to this and they really go crazy on this issue, this is dead.” At the same time he has been writing columns in The New York Post and The Hill newspaper, once offering the analysis that the elderly are working themselves into “a fever pitch” about Obama’s plan.

Less than two weeks before Morris’ appearance on Hannity’s show, the League of American Voters incorporated in Delaware and launched its Web site. By mid-August, the League began identifying Morris as its “chief strategist” and the writer of its first ad.

Precisely when and how Morris connected with the group is not known. He did not respond to requests for an interview.

The League’s executive director, Bob Adams, did agree to an interview. He declined to say exactly how and when the group formed, but he did say that Morris was involved from the beginning and came on board as a volunteer. “I don’t want to get into too many of the nuts and bolts in terms of how we put the organization together,” Adams said.

Adams said that the League’s office on 12th Street in downtown D.C. affords him space “a little smaller than a cubicle” and a mail drop. “I believe in a very light, lean and trim operation,” Adams said. “Do I have a big staff and a big office? No. Not at all.”

The address is registered to at least four other conservative nonprofit groups, includingAmericans for Tax Reform, led by Grover Norquist, the longtime anti-tax activist. The League has “no affiliation whatsoever” with Norquist other than as a tenant, Adams said.

Adams lives in West Virginia, where he twice ran for public office, including for state treasurer in 2004. At the time, the Associated Press reported that Adams was late filing campaign finance reports, a violation of state law. He also worked as an aide to former Republican Congressman J.C. Watts Jr. of Oklahoma and for the American Legislative Exchange Council, a conservative group that drafts model legislation for state legislators. At one point Adams campaigned to build support among Latinos for bans on same-sex marriage; the League’s Web site is registered to Latinos USA, a nonprofit venture that Adams said never got off the ground.

On the site, leagueofamericanvoters.com, the group says it is a 501(c)(4) nonprofit, meaning it is exempt from paying taxes so long as it operates “exclusively to promote social welfare,” according to Internal Revenue Service rules.

Since Delaware does not require its corporations to publicly list names of employees and board members, or even an address, until June 1 of the year following its incorporation, the League will not have to make that disclosure until the current health care debate is over.

In the interview, Adams had difficulty coming up with the names of his board of directors. He said they included Alexandra Preate, a New York public relations consultant, a rabbi from New York and a third member whose name he could not recall. Several days after the interview, names of the board members were added to the League’s Web site: Preate; Rabbi Morton Pomerantz, a retired New York state chaplain; and Phil Brennan, identified as a onetime aide to President Gerald Ford.

‘Right on Message’

Nonprofits are not required to disclose their donors, and the IRS does not require social welfare organizations like the League to apply for tax-exempt status. Adams said he saw no reason to offer names of any donors beyond himself. He said he made the first contribution to the League’s bank account while on vacation in late July, walking into a branch with his incorporation document and depositing a $20 bill.

The League now solicits donations through Morris’ Web site and its own, seeking support for its “media campaign to expose the Obama health care plan.” The largest donations have been between $5,000 and $10,000, Adams said, but the League is mostly funded by individual donations in the range of $25 to $50 rather than by “industries, by corporate interests.” Some individuals have written checks from corporate accounts, he said.

“We’ve been attacked by, you know, some outside groups saying we’re a front for this or a front for that,” he said. “I get the mail and I see where the money is coming from. . .They’re coming from all walks of life, all over the country. Republicans, Democrats, independents.”

The donations have been used in part to circulate the group’s ad. Adams said the ad was “right on message” and “hit the President’s proposal right between the eyes.” But he declined to say much more about it because he “wasn’t involved in crafting and creating” it.

Adams said that Preate, the board member and New York public relations specialist, helped arrange the marriage between the League and the ad’s creator, Morris. Contacted for an interview, Preate referred the Investigative Fund back to Adams. “He tells me he spoke with you,” she wrote in an e-mail.

According to the Web site for Preate’s firm, CapitalHQ, she “works with clients ranging from high level government officials domestic and foreign to Fortune 500 companies, Wall Street firms and national and international media organizations.”

The site does not name her clients but states that the firm has secured news coverage for them in several health care media outlets, including Health Care News and Insurancebroadcasting.com. According to news accounts and press releases, her firm has represented at least two health care groups. One is Duravest, Inc., a public holding company that invests in and develops medical technologies. The other is the Center for Medicine in the Public Interest, a nonpartisan think-tank that focuses on health care policy. The center’s president, Peter Pitts, recently wrote an op-ed published by Reuters that described Obama’s proposed public health insurance option as “expensive, radical and unnecessary.”

Preate’s site also links to The Galen Institute, which describes itself as “a research organization focusing on free-market health care reform.”

Without assistance from Preate, Adams or Morris, the Investigative Fund tracked down the producer of the ad on its own.

The trail led to a conservative Tallahassee-based media consultant named Rick Wilson. Wilson has produced a number of political TV ads for Republican and conservative causes. One of his most controversial projects was the 2002 spot that flashed a picture of Osama bin Laden and questioned the patriotism of Georgia Democratic Sen. Max Cleland, a decorated veteran who lost both legs and an arm in Vietnam. Cleland was defeated in his bid for reelection. [Editor's Note 9/25/09: Some Republicans have said that the ad did not question Cleland's patriotism but only his voting record.]

Wilson said he was paid to produce the health care ad before Bob Adams was involved in the League of American Voters — which raises the question: who hired and paid Wilson?

Wilson declined to say. “I treat my clients with the confidentiality that they expect from me,” he said.

The physician who stars in the League’s ad, Mark J. Cuffe, also works in Tallahassee. He is a neurosurgeon who has practiced in Florida since 1993. In the ad, Cuffe begins: “How can Obama’s plan cover 50 million new patients without any new doctors? It can’t. It will hurt our seniors.” Cuffe also was advertised as a panelist on health care policy at a recent local public forum. Florida records show that in 2007, he settled a complaint by the state medical board that he had operated on the wrong site during spinal surgery. Without admitting to wrongdoing, Cuffe agreed to pay $7,500 and perform 50 hours of community service, which he spent working at a hospice. He did not respond to requests for comment.

Autographed Books

After Wilson was finished producing the ad, it appeared on two YouTube sites, one operated by Morris and the other by the National Republican Trust PAC, where the meter showed it was viewed more than 60,000 times in about six weeks.

Federal election records show that the National Republican Trust has worked with both Morris and Wilson in the past. When contacted, however, the group’s director, Scott Wheeler, said the Trust had nothing to do with the health care ad. The ad was removed from the group’s site shortly after the interview.

Morris himself is not among those distancing themselves from the spot or the League. He continues to tout his role in his TV appearances and on his Web site. The League’s site promisesa free autographed copy of his latest book to anyone who donates $250 or more.

Morris also continues to straddle the worlds of advocacy and journalism, using his Web site and TV appearances to stoke opposition to health care legislation among senior citizens while reporting in a recent column for The Hill: “fears of rationing and the denial of care are stoking opposition to a fever pitch among the elderly.”

Until this week, The Hill identified Morris as a bipartisan insider: “Morris, a former adviser to Sen. Trent Lott (R-Miss.) and President Bill Clinton, is the author of Outrage.” Asked on Monday whether Morris’ involvement in the League should also be mentioned, Hugo Gordon, the newspaper’s editor, said only that he has been pleased with Morris’ columns. The following day, however, Morris’ column carried a new disclosure to his biography: “In August he became a strategist for the League of American Voters, which is running ads opposing the president’s healthcare reforms.” Morris’ columns in the New York Post do not carry a similar disclosure.

Meanwhile, the ad Morris created has raised a new problem for the League of American Voters. The spot shocked a member of the League of Women Voters, a 90-year-old nonpartisan group that supports health care reform, who confused the names of the two organizations. The League of Women Voters then wrote Adams a letter asking him to “cease and desist from using a name so deceptively similar.”

“Your organization is playing on our good name and reputation and thereby seeking to add credibility to yours, which clearly has none,” wrote Mary Wilson, the president of the League of Women Voters.

Adams has not responded to Wilson. “I don’t work for her; she’s not entitled to a response from me,” Adams said. “It was a hysterical, obnoxious letter.”

At Appalachian Fairgrounds, charity tries to fill gaps in health care

Virginia,United States — 2011-10-11T17:54:16-04:00

WISE, Va. – On a sunny Saturday at the county fairgrounds in this Appalachian community, the gaps in the American health care system were on vivid display.

Lured by the promise of a weekend of free checkups, surgeries and dental care, thousands of people turned up two weeks ago in the far southwest corner of Virginia, as shown in the video documentary that accompanies this article. Many of those families would have much better access to medical help under the reform plans being debated in Congress. But a close look at the most recent data indicates even the most sweeping proposals are likely to leave some of them outside the safety net.

About 50 million people in the United States are now uninsured, according to new figures from the Congressional Budget Office. If an overhaul of the system is launched this year, as many as 17 million people would still be without health insurance by the end of the decade, according to preliminary analyses by the CBO.

Up to half of those falling through the cracks would be that portion of the working poor who make too much to qualify for free care or federal subsidies, but feel too cash-strapped to buy their own policies. Most of the rest would be undocumented immigrants.

The three-day free clinic that began July 24 at the Wise County Fairgrounds was run by a charity called the Remote Area Medical Corps, which gathers doctors and nurses who volunteer their services.

Whole families waited for hours in animal stalls set up as temporary offices for mammograms, diabetes tests and checks on various aches and pains.

Hundreds were shut out of eye and dental exams when doctors and medical staff were overwhelmed by the numbers. No one, among those interviewed, could afford to go elsewhere.

“The need has always been great. What we are seeing now, of course, are more people who have lost their jobs or lost their insurance,” said Stan Brock, founder of Remote Area Medical Corps, which has been sponsoring clinics around the world and in the United States for two decades.

People at the Wise fairgrounds voiced conflicting thoughts about their status. Some openly feared a government takeover of health care. Others said they doubted that politicians could challenge the special interests that influence the cost and availability of treatments. All admitted they had no inkling if they would be better off after the historic overhaul.

All health care proposals now moving through the House and Senate are aimed at requiring people to carry insurance. People who fall below an expanded poverty line — $14,403 for an individual or $29,326 for a family of four. Families and individuals who earn too much for Medicaid would qualify for direct government subsidies to buy health insurance, either privately or possibly through a government-run option -- up to an income cutoff level that is still being debated in Congress.

The Congressional Budget Office has calculated that subsidies could cost as much as $773 billion from 2013 to 2019.

But there are significant differences between the House and Senate over how much to spend on broadening the medical safety net.

The current House proposal would support subsidies for people with incomes up to 400 percent of the poverty level. That means a family of four earning up to $88,200 a year could qualify for some federal help to offset their premiums. An individual could earn up to $43,320 and qualify for some aid.

Talk in the powerful Senate Finance Committee has suggested a more restrained scale of help for those currently uninsured. People could qualify if they earn no more than 300 percent of the poverty level. That means $66,150 for a family of four and $32,490 a year for an individual.

People earning above those levels would begin to pay full premiums and deductibles – although under the current proposals they would be eligible for government aid if they had to pay more than 12 percent of their incomes toward health care.

Doctors familiar with the expectations and needs of the working poor said they are concerned about where the lines of assistance will be drawn. “There will probably still be some people who fall through the cracks,” said Wende Kozlow, a staff physician at University of Virginia who has volunteered at the Wise clinic in previous years.

Those who just miss qualifying for the subsidy might figure it would be cheaper to go without insurance, pay the federal penalty – proposed to be up to 2.5 percent of their income – and hope they don’t get sick.

“The House bill would help a lot…But the one emerging from the Senate Finance Committee troubles me,” said Wendell Potter, a former health care executive who was motivated by Remote Area Medical’s work to change his own career and advocate for reform.

Jennifer Tolbert, an analyst for the Kaiser Family Foundation who has monitored the shifting sands of the health care proposals, said the Obama administration has undertaken ambitious reforms. But, she said, universal coverage will be elusive no matter what legislation emerges in the coming weeks.

Some people will inevitably be left behind, Tolbert said, because “we’re building on a flawed system.

In rural Virginia, relief is rare for uninsured

2011-10-11T17:54:16-04:00

gaps in the American health care system were on vivid display in Virgina