Wednesday, January 7, 2009

Black Box Deals, AIG, J.P Morgan Chase, and CDR Financial Products: A Summary of Corruption

Wall Street created $7 billion in bonds for housing and schools. The tax-exempt deals were a ruse; banks and advisers collected millions in fees and investment gains. The public got nothing

Pastor Willie Williams frowns as he approaches a 10-foot-high concrete wall that's topped by spirals of barbed wire. On a steamy August morning in Pensacola, Florida, he's entering the Oakwood Terrace apartments for low-income residents. Williams, 62, shakes his head as he passes an unmanned security station.

``It looks like a concentration camp,'' he says.
So begins the story Broken Promises published in 2006 by William Selway, Martin Z. BraunDietz for Bloomberg Markets and David . Its a stunning story of byzantine accounting rules, greed covered in the veneer of altruism, and old fashioned corruption. Its a story that has torpedoed Bill Richardson and extends across this nation from coast to coast.

Black Box Deals

Pay for play is something of a misnomer regarding the various Municipal Bond Scandals that have cheated the US tax payers out of 100 million dollars, undermined trust in the Bond market, and left whole communities, especially low income areas devastated. In reality they are known as black box deals. Black Box deals earned the name from being opaque in nature an designed to enrich the people who put the deals together. The schemes revolve around the raising of Municipal Bonds for local governments to finance various improvements(low income Housing, computers for schools, etc..). In regards to the scandals that have swirled around various "deals" that have been in the news lately, three key players were involved, Anchor National , which was a subsidiary of AIG, CDR Financial Products who actually put the deals together, and JP Morgan Chase which would underwrite the whole affair. A 4th player would be local government in whose name the municipal bonds would be floated. A central part of these deals was that local government would forfeit financial decisions on the dispersion of the cash to the three companies, a fatal error as it would turn out. For the companies would come to an understanding that the less money spent, the more money they could make. Leading to communities who would get their hopes up over new improvements funded by bonds floated in their name, only to see not a dime spent but millions made by AIG, CDR and JP Morgan Chase. It all came down to charging fees to carry out the deals:
``Black box deals, pooled deals, blind pools -- people call them lots of things,'' says Sherman Golden, an Atlanta-based bond lawyer, who says he experienced one of these deals firsthand when he was a municipal official. He says he's seen too many schemes that benefited banks and other promoters at the expense of taxpayers. ``The motivation is always the same: the fees,'' he says.

The Capital Trust Fund
Gulf Breeze Florida population 6,455 is small town then ended up becoming ground zero for some of the worst Black Box deals. As part of a plan to provide local financing, the town government created The Capital Trust Agency, a government body that was made up of 3 people and had an office behind the local police station. The agency quickly turned over its authority to CDR and Anchor National Life Insurance CO (An AIG Subsidiary) If it seems strange for small time government to be involved with such big players, it was no accident. These groups troll for just this type of government to float bonds for. As described in Broken Promises:
The banks' proposals to authorities often sound too good to turn down, says Mark Schwartz, a Bryn Mawr, Pennsylvania-based lawyer who specializes in corporate fraud and sold municipal bonds as head of the mid-Atlantic region for Prudential Financial Inc. from 1986 to 1989. ``It's typically the poorest people who get involved in these scams,'' Schwartz, 52, says. ``That's where the least-sophisticated municipal officials are.''
Charles Lecroy goes to Gulf Breeze
Charles Lecroy , former J.P Morgan Chase employee, went to Gulf Breeze and it was he who convinced them to create the Capital Trust Agency to float a multi-million dollar housing bond. Lecroy who would later be sentenced to three months for a municipal corruption scandal in Philadelphia, convinced Gulf Breeze that the money raised through a bond issue could be by non-profit groups to buy low income housing and improve upon them. The end results:
In 1999 and 2000, Gulf Breeze became a money machine for CDR, JPMorgan Chase and Anchor National, which became AIG SunAmerica Life Assurance Co. Three deals -- two for housing and another to improve assisted-living centers -- produced about $29 million in fees for the bank and other participants, according to an analysis of expenses over the life of the bonds.

In reality Anchor National had a secret deal with CDR that would provide an incentive not to spend money. This was the smoking gun and in violation of U.S tax code, by the way Rubin's defense is that no one ever asked about it and claims he would have come forth if anyone asked. By 2004 it became apparent that something was amiss, in May of that year Ed Gray, the the executive director of Capital Trust wrote to the head of AIG(the owner of Anchor National) to complain, the result:
Two months after Gray wrote to Greenberg, AIG and Capital Trust reached a settlement with the IRS. It paid the IRS. The bottom line on the $220 million housing bond: $12 million in fees to banks, insurers and advisers; $920,000 to the U.S. Treasury; and zero spent on housing.

After being burnt the first time a second housing deal worth 130 million where at least 85% of the money was spent by a local housing foundation which bought 6 apartment complexes with the intent of refurbishing them. Rubin himself blames the Boston based Community Builders Inc. who were tasked to spend the first housing bond.

Exploiting Alzheimer's Patients

In 1999 Gulf Breeze itself made a deal with AIG, CDR, and J.P Morgan Chase to improve the assisted living of Alzheimer Patients. In all the city sold 300 million dollars worth of bonds and all told only 10% of that money was used to actually help patients:
Thomas Conklin, a Sarasota, Florida-based lawyer who is board chairman of the nonprofit Johnnie B. Byrd Sr. Alzheimer's Center & Research Institute in Tampa, says it's shocking that most of the bond money was never used to help Florida's 450,000 Alzheimer's disease sufferers.
``To say you're going to benefit a dreaded disease like Alzheimer's and then nothing comes through, that's a sham,'' he says. ``They need real help now. It's an incredible story of exploitation.

Florida is Not Alone
The list of black box deals is quite extensive, for example:
In Georgia AIG, CDR, and Chase floated a 150 million dollar bond in Fulton County, over 5 million dollars in fees was collected and zero was actually spent on housing. In 1999 in Illinois a company called Austin Meade Financial managed to exploit a 150 million dollar bond that was intended to put computers in the classroom for Chicago students, of that only 1% was ever spent. My own research has found a small 1,000 dollar donation to the Daley political machine by the company, but I suspect there is more to be found. In Oklahoma 450 million in bonds was floated with zero ever being sent. For the Oklahoma deal a lawyer by the name of Ron Tym appears to have been the driving force behind it. The results of this deal has been described as a nightmare with lower and working class people taking the brunt of the damage.

Thoughts on a Scandal

1. The use of altruism be it low income housing or Alzheimer patients seems to be a standard tactic of exploitation.
2. God bless local government, but in reality they simply weren't prepared or were simply bedazzled by fast talking salesmen representing "reputable companies". These deals are complicated and opaque by design.
3. Is it any wonder AIG went under, if this was the standard business practice its clear this was not a viable company.
4. CDR and David Rubin who are inextricably linked to the Democratic party have managed to make millions off the exploitation of groups it was looking out for.
5. Bloomberg Markets and reporters William Seway, Martin Z. Braun, and David Dietz have written one of the finest pieces of reporting I have read.(They were honored for their achievement in 2007.)
6. When you see talk of local bond issues and you just don't care, get involved and get information.
7. I truly believe that by pulling the threads on this scandal we could see the unraveling of a significant portion of the Democratic party.
7. If the integrity of the municipal bond market is destroyed, what happens to the country?

Broken Promises fittingly ends with this reporting:

Nothing But Anger

Public officials in Florida, Georgia and three states in the Midwest say they were deceived by bankers or lawyers and now are left where they started, minus payments to the IRS.

In Pensacola, Pastor Williams looks over his shoulder at the Danger sign on the barbed-wired wall ringing the housing project. ``You hope that something would change, that something would actually come true,'' he says. ``But it doesn't, and it leaves you with nothing but anger. Now we're right back in a cesspool.'
For the full roundup of Pay For Play CDR and the Democrats click here.

Additional Info of CDR, the Democrats.
1. New Mexico award CDR won 1.4 million dollars from the New Mexico government after donating 100,000 dollars to two Richardson organizations. This is the incident the FBI has pushing hard on.
2. David Rubin of CDR has been involved in Politics from being on Ed Rendell's transition team in 2003, to being appointed to the LA Housing Authority.
3. CDR has been involved in Low Income Housing plans with the now bankrupt Freddi Mac.
4. CDR was involved in possible corruption in Philadelphia from 2000-2003.
5. CDR managed to leave low income housing called Oakwood Terrace as a cesspool.
6. CDR May have also swindled Atlanta.
7. ON Sept 28th2007 the SEC fined CDR and Anchor National Life Insurance Company,(A company owned by AIG) for various corruption scandals.
8. CDR and David Rubin have poured 10's of thousands of dollars in various Democrats including Hillary Clinton and President-Elect Obama.
9. For CDR's connections to Ed Rendell and contracts won from Pennsylvania, click here and here.
10. For a better look at CDR's donations on a Federal level click here.

For more on Richardson and CDR click here and here.
For the damage CDR has done check here, here and here.
For a glimpse of CDR's donations click here.
For info on CDR click here.


  1. Still waiting for the end of the culture of corruption.

  2. The First Wave of indictments just got started today! Be patient and get you some popcorn and watch, unless you are one of the co-conspirators mentioned in the article above then in that case, I would reccomend you get a good lawyer and get used to wearing STRiPES.