Art O’Connor

Take a good look at some of the 17 people our nation’s president-elect chose last week for his Transition Economic Advisory Board. And then try saying with a straight face that these are the leaders who should be advising him on how to navigate through the worst financial crisis in modern history.

First, there’s former Treasury Secretary Robert Rubin. Not only was he chairman of Citigroup Inc.’s executive committee when the bank pushed bogus analyst research, helped Enron Corp. cook its books, and got caught baking its own. He was a director from 2000 to 2006 at Ford Motor Co., which also committed accounting fouls and now is begging Uncle Sam for Citigroup- style bailout cash.

Two other Citigroup directors received spots on the Obama board: Xerox Corp. Chief Executive Officer Anne Mulcahy and Time Warner Inc. Chairman Richard Parsons. Xerox and Time Warner got pinched years ago by the Securities and Exchange Commission for accounting frauds that occurred while Mulcahy and Parsons held lesser executive posts at their respective companies.

Mulcahy and Parsons also once were directors at Fannie Mae when that company was breaking accounting rules. So was another member of Obama’s new economic board, former Commerce Secretary William Daley. He’s now a member of the executive committee at JPMorgan Chase & Co., which, like Citigroup, is among the nine large banks that just got $125 billion of Treasury’s bailout budget.

There’s More

Obama’s economic crew might as well be called the Bailout Bunch. Another slot went to former White House economic adviser Laura Tyson. She’s been a director for about a decade at Morgan Stanley, which in 2004 got slapped for accounting violations by the SEC and a month ago got $10 billion from Treasury.

That’s not all. There’s Penny Pritzker, the Obama campaign’s national finance chairwoman. She was on the board of the holding company for subprime lender Superior Bank FSB. The Chicago-area thrift, in which her family held a 50 percent stake, was seized by the Federal Deposit Insurance Corp. in 2001. The thrift’s owners agreed to pay the government $460 million over 15 years to help cover the FDIC’s losses.

Even some of the brighter lights on Obama’s board, like Warren Buffett and former SEC Chairman William Donaldson, come with asterisks. Buffett was on the audit committee of Coca-Cola Co.’s board when the SEC found the soft-drink maker had misled investors about its earnings. Donaldson was on the audit committee from 1998 to 2001 at a provider of free e-mail services called Mail.com Inc. Just before he left the SEC, in 2005, the agency disciplined the company over accounting violations that had occurred on his watch.

Telling Stories

So, by my tally, almost half the people on Obama’s economic advisory board have held fiduciary positions at companies that, to one degree or another, either fried their financial statements, helped send the world into an economic tailspin, or both. Do you think any of that came up in the vetting?

Let’s say we give Buffett a pass — smart move he made, skipping the group photo-op last week in Chicago. What about the rest of them? Donaldson, for one, was chairman when the SEC voted in 2004 to let the big Wall Street banks, including Lehman Brothers Holdings Inc. and Bear Stearns Cos., lever up their balance sheets like drunks. Talk about blowing it.

And whom did Obama tap for White House chief of staff? Rahm Emanuel, the Illinois congressman who was a director at Freddie Mac in 2000 and 2001 while it was committing accounting fraud.

Ideally, this job would go to someone who can’t be easily fooled. Think about it: Of all the people Obama could have chosen as his chief of staff, couldn’t he have found someone who wasn’t once on the board of Freddie Mac?

Renewed Confidence

The president-elect needs some new advisers — fast. We are in a crisis of confidence in American capitalism. These aren’t the right people to re-instill its sense of honor.

Many of them should be getting subpoenas as material witnesses right about now, not places in Obama’s inner circle. Did Obama learn nothing from the ill-fated choice of James Johnson, the former Fannie Mae boss, to lead his vice- presidential search committee?

Does he think people like Robert Rubin or Richard Parsons will offer any helpful advice on how to stop crooked bankers or sleep-walking directors from sinking our economy? Or that they won’t mistake the nation’s needs for their own corporate interests? Or that the people who helped get us into our long financial nightmare have any clue how to get us out?

Obama has created hope that our nation can stand for all that is good in the world again. It’s not too late to change course.

Paulson, in an update on the Treasury’s financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.

“Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources,” Paulson told a news conference.

When Treasury was selling the $700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.

But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock. The Treasury has allocated $250 billion of the fund to such purchases so far.

Paulson said the Treasury is evaluating a second program that would provide government investments that would match private investments in capital raisings.

“In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program,” Paulson said.

He also said support was needed for the markets that securitize credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

“It’s your money; it’s not the Fed’s money,” said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. “Of course there should be transparency.”

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn’t respond to a phone call and an e-mail seeking comment.

The Fed’s lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan — without safeguards put into the TARP legislation by Congress.

$2 Trillion

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the “lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,” according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

`We Need Transparency’

The legislation didn’t require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used “when appropriate.” In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

“We need oversight,” Paulson told lawmakers. “We need protection. We need transparency. I want it. We all want it.”

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. “Transparency is a big issue,” he said.

Banks Resist Disclosure

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

Frank Backs Fed

The nation’s biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed’s disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

“I talk to Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

`Unclog the Market’

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

TARP’s $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks’ troubled assets while markets were frozen.

The Bloomberg lawsuit argues that the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

AIG Lending

The Fed has lent at least $81 billion to American International Group Inc., the world’s largest insurer, so that it can pay obligations to banks. The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

“As a taxpayer, it is absolutely important that we know how they’re lending money and who they’re lending it to,” said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank’s rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody’s Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

As part of the vetting process, the transition team is reviewing Corzine’s financial and personal documents, the sources said. The sources asked not to be identified because the vetting process is confidential.

Neither Corzine nor his aides would respond to a request for comment.

Corzine, who used to run financial services giant Goldman Sachs, had long dismissed as speculation talk that he might be interested in running the sprawling U.S. Treasury Department. But in recent days he has changed his message, telling a television interviewer “No one’s ever going to say never.”

Corzine said last night that if President-elect Barack Obama asked him to serve in his administration, he would consider the offer — but that he’d rather fight for a second term in New Jersey.

“I’d like to stay here and use New Jersey as a basis” and example for the rest of the country, Corzine said on New Jersey Network from the victory party of U.S. Sen. Frank Lautenberg (D-N.J.).

The governor has long, deep ties to Obama after having been an early advocate for the president-elect’s upstart campaign for U.S. Senate in 2004. Though Corzine backed Obama’s opponent, Hillary Clinton, in the Democratic primaries, the governor quickly moved to renew his relationship with Obama after the president-elect had secured his party’s nomination. Since then, Corzine has played a key role in Obama’s universe as an economic adviser and booster for the incoming president.