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The question has
surfaced several times in the last few weeks as to whether or not it was
possible that Goldman Sachs was colluding with the Clinton Administration on the
loan sales without the knowledge of the HUD loan sales team. The fact that Dan
Hawke, Ervin's attorney from 1995-1999, was the son of Jerry Hawke (#3 at
Treasury, then Comptroller, former head partner of Arnold & Porter
where he was partner with Jack Quinn, former Gore chief of staff and White House
Counsel) as well as recent developments on Goldman's role in Russian flight
capital from 1995-97 and on the BONY shareholder suit has given energy to
looking at this question.
What was
feasible given the facts that we know ?
Fact One: Goldman and its bidding partners
(BlackRock and others) won at the loan sales because they paid the highest
price, with the exception that our optimization error may have disadvantaged
them on one sale and advantaged them on another....net net they were the loser
in principal amount for the averaging in the programming of the floor
definition.
Fact Two: The HUD
Loan Sales team with Hamilton's help ran the auctions clean. The design of the
process had so many checks and balances that bid rigging or insider trading was
not possible. The winning prices and profits confirm this.
Fact Three: My
efforts to persuade HUD to bid the single family one mortgage at a time were
stopped by Chris Peterson's pleas that they could not handle the closings if
small bidders did pay more. I was moved by the desire to increase prices and
Barrons interest in giving us major coverage if we did it. Helen remembers that
our folks (Huebscher, Ladd) we supportive of the $1 MM pool limit. Was Chris
sincere, or did he have other motives? We don't know.
Fact Four: Goldman
Sachs, according to the Center for Public Integrity, was, as of 1996, Bill
Clinton's #1 lifetime campaign donation supporter.
Fact Five: HUD and
OMB took full advantage of loan sales results to assume the most favorable
credit reform treatment and to increase new originations, even after loan sales
were suspended.
Fact Six: Nic
Retsinas reported that the White House had illegally ordered him to not allow us
to win new contracts (ie, to fire us). A reliable source said that they had
ordered the Assistant Secretary of Administration to do the same. The timing on
this would have been end of 1995/early 1996.
In this fact
pattern, what collusion was theoretically possible?
It was possible that
Treasury with or without the White House and DOJ could have colluded to
ensure that Goldman (and bid partners or other bidders such as GE and/or
Lehman ) could bid above market as a result
of:
1. low cost capital
to bid with--this could have been accessible before or after the bid. The
capital could have been accessible to Goldman in different areas, not
necessarily used on this transaction, but arranged as --in essence--a
"swap"
2. guaranteed take
outs of portions of the portfolios won
3. expedited support
from HUD and DOJ or other federal agencies on a variety of refinancing or other
issues
In return, the
Administration could have gotten:
1. Above market bids
that would translate into liberal assumptions for credit reform (see description
below) in a way that made much more HUD credit and budget profits available to
the Administration than otherwise
2. Special treatment
of parts of the portfolio in which the government and its covert networks had an
interest (fraud. money laundering, SEC violations, tax
relief)
3. Special treatment
of parts of the portfolio in which friends of the DNC and Clinton campaign had
an interest (fraud. money laundering, SEC violations, tax
relief)
4. Special treatment
of parts of the portfolio in which members of the Administration had an interest
(fraud. money laundering, SEC violations, tax relief)
5. Campaign
donations to the Clinton campaign, to the DNC, or to related
campaigns...Teamsters, Russia
Under such a
scenario, the repeated leaks that kept assuring that there was collusion on the
loan sales could be explained as either coming from the Hunger, Hawke, Cuomo,
Glasser networks, but including the highest levels of Treasury and OMB or indeed
were from folks aware of collusion on the capital side (financing and take outs)
as opposed to the auction side (bid and disclosure).
Our consensus
belief (Fitts,
Betts, Blake, Dunlap) appears to be that a driving force
in what has happened was the Democrat's desperation to raise money, starting in
1995-96. Cisneros was from Texas and running HUD relatively by the book. There
was no way that he could help them win Texas in a 2000 race against Bush. In the
meantime, someone like Cuomo could help them use HUD to win California, New York
and Florida. Cuomo had raised money for his dad from the time he was 23. He knew
the ropes and the HUD money well. The elegance of what was done to
the Cisneros team and us was that it shut down the clean guys at the same time
it blamed them for whatever pork/corruption the new team wanted to
do. The question is whether or not it also protected the
Administration from charges of collusion on the capital
side.
I think the thing that
needs to be looked at is on credit reform on the single family bids. If Goldman
could have bid up the recovery rates high enough, could that translate into
credit reform assumptions on FHA (as well as possible VA and FmHA) that
would translate into the Administrations ability to issue substantial volume
increases in mortgage insurance new originations in a manner that would generate
budget profits. So $billion spent on bidding above market could "create" $150 MM
of new credit plus $5 billion of "surplus". A detailed review of the credit
reform history on the single family side will show
more.
The history of the
FHA single family fund during the Clinton Administration is important to review
in light of what we have seen in the money laundering area---essentially no
enforcement effort on money laundering in mortgage banking and homebuilding
combined with an explosion of FHA and federal credit with little objection from
the private mortgage industry. The explosion of money laundering in the US
during the Clinton Administration (to $500 billion a year), combined with the
explosion of FHA credit at questionable credit reform assumptions combined with
the complete absence of any money laundering enforcement in this area is worth
looking into. Again, I should note that the resolution process that FHA switched
to in 1998 of foreclosures is one in which the mortgage file is never sold to
the new buyers. Also that Goldman was very successful on the single family
side.
I would also like to
compile a definitive record of Goldman's bidding and the bidding of its bidding
partners. As well, I would like to look at GE and Lehman's
bidding record --any
other active bidders . It is quite possible that the
Administration could use more than one firm and that might explain the tight
bidding reported between Lehman and Goldman.
Comments and
questions welcome. Again, I am not trying to imply that there was collusion,
simply understand what was possible and whether or not the patterns support such
a possibility.
Thanks.
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