Illinois Governor Arrested on Federal Corruption Charges

The Senate seat that the highly unpopular Democratic Governor was attempting to 'sell' is the one being vacated by President-elect Barack Obama. There is no linkage to Senator Obama, and we are sure that if there was the slightest taint the Justice Department would be putting it forward vigorously. Or pocketing it for a rainy day. Obama must address this quickly.

The first Democrat to be elected governor of Illiniois in 30 years, Blagojevich has been the target of multiple federal investigations. If Blagojevich is found guilty he should be punished severely. We will not jump to any conclusions, but Chicago politicians are often notorious for playing it on the edge, similarly but more crudely than their more sophiticated northeastern and southern cousins.

As the administration, and the Justice Department, turns from Republican to Democratic, looks for an increasing series of indictments for Republican corruption. There will be a pre-emptive series of pardons by the outgoing President Bush.

Such are the ways in times of general corruption. Anyone who thinks this is the domain of either party in particular is greatly mistaken. We are in a cultural crisis of integrity and honesty, overwhelmed by greed.

“I want to make money,” adding later that he [Blagojevich] is interested in making $250,000 to $300,000 a year, the complaint alleges. (Joe the Governor? - Jesse)

Top Five Candidates for Obama's Senate Seat


US Department of Justice
ILLINOIS GOV. ROD R. BLAGOJEVICH AND HIS CHIEF OF STAFF JOHN HARRIS ARRESTED ON FEDERAL CORRUPTION CHARGES
Patrick Fitzgerald, US Attorney
December 9, 2008

Blagojevich and aide allegedly conspired to sell U.S. Senate appointment, engaged in “pay-to-play” schemes and threatened to withhold state assistance to Tribune Company for Wrigley Field to induce purge of newspaper editorial writers

CHICAGO – Illinois Gov. Rod R. Blagojevich and his Chief of Staff, John Harris, were arrested today by FBI agents on federal corruption charges alleging that they and others are engaging in ongoing criminal activity: conspiring to obtain personal financial benefits for Blagojevich by leveraging his sole authority to appoint a United States Senator; threatening to withhold substantial state assistance to the Tribune Company in connection with the sale of Wrigley Field to induce the firing of Chicago Tribune editorial board members sharply critical of Blagojevich; and to obtain campaign contributions in exchange for official actions – both historically and now in a push before a new state ethics law takes effect January 1, 2009.

Blagojevich, 51, and Harris, 46, both of Chicago, were each charged with conspiracy to commit mail and wire fraud and solicitation of bribery. They were charged in a two-count criminal complaint that was sworn out on Sunday and unsealed today following their arrests, which occurred without incident, announced Patrick J. Fitzgerald, United States Attorney for the Northern District of Illinois, and Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the Federal Bureau of Investigation. Both men were expected to appear later today before U.S. Magistrate Judge Nan Nolan in U.S. District Court in Chicago.

A 76-page FBI affidavit alleges that Blagojevich was intercepted on court-authorized wiretaps during the last month conspiring to sell or trade Illinois’ U.S. Senate seat vacated by President-elect Barack Obama for financial and other personal benefits for himself and his wife. At various times, in exchange for the Senate appointment, Blagojevich discussed obtaining:

- a substantial salary for himself at a either a non-profit foundation or an organization affiliated with labor unions;

- placing his wife on paid corporate boards where he speculated she might garner as much as $150,000 a year;

- promises of campaign funds – including cash up front; and

- a cabinet post or ambassadorship for himself.

Just last week, on December 4, Blagojevich allegedly told an advisor that he might “get some (money) up front, maybe” from Senate Candidate 5, if he named Senate Candidate 5 to the Senate seat, to insure that Senate Candidate 5 kept a promise about raising money for Blagojevich if he ran for re-election. In a recorded conversation on October 31, Blagojevich claimed he was approached by an associate of Senate Candidate 5 as follows: “We were approached ‘pay to play.’ That, you know, he’d raise 500 grand. An emissary came. Then the other guy would raise a million, if I made him (Senate Candidate 5) a Senator.”

On November 7, while talking on the phone about the Senate seat with Harris and an advisor, Blagojevich said he needed to consider his family and that he is “financially” hurting, the affidavit states. Harris allegedly said that they were considering what would help the “financial security” of the Blagojevich family and what will keep Blagojevich “politically viable.” Blagojevich stated, “I want to make money,” adding later that he is interested in making $250,000 to $300,000 a year, the complaint alleges.

On November 10, in a lengthy telephone call with numerous advisors that included discussion about Blagojevich obtaining a lucrative job with a union-affiliated organization in exchange for appointing a particular Senate Candidate whom he believed was favored by the President-elect and which is described in more detail below, Blagojevich and others discussed various ways Blagojevich could “monetize” the relationships he has made as governor to make money after leaving that office.

“The breadth of corruption laid out in these charges is staggering,” Mr. Fitzgerald said. “They allege that Blagojevich put a ‘for sale’ sign on the naming of a United States Senator; involved himself personally in pay-to-play schemes with the urgency of a salesman meeting his annual sales target; and corruptly used his office in an effort to trample editorial voices of criticism. The citizens of Illinois deserve public officials who act solely in the public’s interest, without putting a price tag on government appointments, contracts and decisions,” he added.

Mr. Grant said: “Many, including myself, thought that the recent conviction of a former governor would usher in a new era of honesty and reform in Illinois politics. Clearly, the charges announced today reveal that the office of the Governor has become nothing more than a vehicle for self-enrichment, unrestricted by party affiliation and taking Illinois politics to a new low.”

Mr. Fitzgerald and Mr. Grant thanked the Chicago offices of the Internal Revenue Service Criminal Investigation Division, the U.S. Postal Inspection Service and the U.S. Department of Labor Office of Inspector General for assisting in the ongoing investigation. The probe is part of Operation Board Games, a five-year-old public corruption investigation of pay-to-play schemes, including insider-dealing, influence-peddling and kickbacks involving private interests and public duties...

SP 500 Weekly Chart

There has been some interest expressed in seeing this chart in 'the Babson style'

A top in US Treasuries will mark and confirm a bottom in equities.

This ongoing series of crises will be done when bonds and stocks crash together and the dollar is out of favor. Then the rebuilding will begin.

Too Big to Jail

"Among a people generally corrupt, liberty cannot long exist."
Edmund Burke

Although Nassim Taleb makes some excellent points he is a bit narrow in his analysis because of his superior knowledge and experience in a highly specific area of the crisis, which in some ways is a broader cultural crisis.

There may be enough fraud involved in the US over the past twenty years for multiple prosecutions under the RICO statutes. Or it just may be the end result of a general breakdown in morals, from the top down by example perhaps.

One does find some institutions appearing as enablers at the heart of every crisis, from LTCM to Enron to the Accounting Frauds to the Tech Bubble to the Credit Bubble.

No, this was worse than the silence of the witnesses to the assault of Kitty Genovese that gave the label to the bystander effect.

In this case there were 'bystanders' who financially benefited from the assault and who not only kept quiet but actively intimidated and silenced other bystanders through ridicule and fear of retribution. But there are also many who simply did not care then and will not care once the markets rally once again. This is the sad commentary on a nation corrupted by easy money.

There were many bystanders who did call 911 and were ignored because those in the enforcement chain were either asleep on the job or had other competing interests.

The practical problem is that the institutions involved are probably too big to jail.

That is their strength, but ironically also their weakness.


The Financial Times
Bystanders to this financial crime were many
By Nassim Nicholas Taleb and Pablo Triana
December 7 2008 19:18

...Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the “bystander effect”. This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.

We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).

Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.

Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.

So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”