Tag Archives: Marian Wang

That Missing Ounce Of Prevention

Chris Rovzar at New York Magazine:

The Times takes an exhaustive look this week at the so-called “blowout preventers,” complex devices that wrap oil pipes deep underwater, near where they emerge from the earth, and are designed to shut off leaks in the event of a catastrophe. Specifically, the paper looked at the effectiveness of “blind shears,” contraptions that cut through pipes in times of emergency and seal them off. The shears have to create thousands of pounds of pressure to get through the tough metals of the pipes, and have to create a perfect seal. The devices are incredibly complex and contain many parts that can easily fail and render the enter machine ineffective. It’s not that the oil companies and the government don’t know about these risks — the devices have been tested many times over the past ten years — the problem is that the known problems weren’t compensated for, and in the case of the Deepwater Horizon well currently gushing oil into the Gulf of Mexico, a commonly installed backup blind shear wasn’t even built.

These blind shears are “remarkably vulnerable,” says the Times, and at 5,000 feet underwater, incredibly complicated to fix. As the oil spill worsened, before the Deepwater rig exploded, engineers frantically tried to engage, and then fix, their own failed shear. There would have been a second shear had the Minerals Management Service acted on one of their own studies, which revealed that two of the devices vastly increased the likelihood of avoiding a major spill. Studies in 2002 and 2004 revealed the following:

When the team examined the performance of blind shear rams in blowout preventers on 14 new rigs, it found that seven had never been checked to see if their shear rams would work in deep water. Of the remaining seven, only three “were found able to shear pipe at their maximum rated water depths.”
The Times study is full of a lot of very obscure facts and technology, and while it casts some blame on the “Obama administration,” it’s impossible to imagine that the president himself, or even anyone in the White House, knew anything about these subjects before April 20. Not that this matters when, as the evidence increasingly suggests, the government has systematically failed to protect us and the environment from exactly the disaster that unfolded so quickly this spring.

David Dayen at Firedoglake:

I don’t think there’s any doubt that the explosion on the Deepwater Horizon rig had a man-made cause. We have an eyewitness survivor of the blast now willing to say that the blowout preventer was leaking for weeks before the explosion, and BP and Transocean failed to repair the valve in response, merely shutting it off instead. If they actually repaired it, that would shut down production. The last line of defense, the “blind shear ram,” designed to slice the pipe and seal the well in the event of a disaster, malfunctioned, and BP never had to show proof that the technique would actually work. In fact, the Deepwater Horizon, unlike every new BP well, had only one blind shear ram; two are now standard.

A legitimate Minerals Management Service could have known about the leaking blowout preventer before the blast. It could have acted on the inherent problems with the blind shear ram and the oil industry’s failsafe measures in general (blowout preventers have a 45% failure rate, according to a confidential Transocean report). But we didn’t have a legitimate MMS to deal with this disaster. We have 62 regulators dealing with over 4,000 offshore rigs in the Gulf of Mexico.

Chris Morran at The Consumerist:

According to a memo released by Congressman Ed Markey, BP put a top level estimate on the amount of oil spilling into the Gulf at around 100,000 barrels a day. That’s significantly higher than even the current U.S. Government guess of around 60,000 barrels/day.

A rep for BP tried to downplay the numbers in the document by saying that this was a worst-case scenario estimate, which would apply only if the blowout preventer was completely removed: “Since there are no plans to remove the blowout preventer, the number is irrelevant.”

The rep maintains that, regardless of the amount of crude being pumped into the Gulf waters, the company’s position has always been that it “would deal with whatever volume of oil was being spilled.”

Speaking of the blowout preventer, a worker on the Deepwater Horizon, the offshore oil rig whose collapse killed 11 and kicked off the worst spill in U.S. history, says that he and his employers attempted to notify BP of problems with the blowout preventer weeks before the April 20 disaster.

The blowout preventer has two control pods that work to operate the device that should have stopped the massive amount of leakage into the Gulf. But, speaking to the BBC over the weekend, the worker says that BP ignored warnings from those aboard the rig.

“We saw a leak on the pod, so by seeing the leak we informed the company men,” he recalled. “They have a control room where they could turn off that pod and turn on the other one, so that they don’t have to stop production.”

Marian Wang at ProPublica:

Regulatory reliance on industry, recruitment troubles, and lax enforcement have long plagued the Minerals Management Service, but according to congressional testimony given by the Interior Department’s inspector general, Mary Kendall, the agency’s problems are bigger than that [1]. [PDF]

“The greatest challenge in reorganizing and reforming MMS lies with the culture—both within MMS and within industry,” Kendall told the House Natural Resources Committee in little-noticed comments last Thursday.

Regulations are lacking and are “heavily reliant on industry to document and accurately report on operations, production and royalties,” Kendall said.

A recent example of that? BP’s letter to Sen. Chuck Grassley, R-Iowa, in which the company said that it was “not aware of any MMS practice [2]” [PDF] to demand compliance with a law requiring oil companies to provide proof that blowout preventers’ shear rams could function effectively. (Shear rams are used to stop a blowout by closing off a pipe by cutting through it. But as a great investigation in this morning’s New York Times shows, not only did the shear rams fail on the Deepwater Horizon, but they’ve frequently failed in other blowouts too [3]. The Times cites an industry study showing that in the case of deep-water wells, the shear rams failed nearly half the time. What’s more, as the Times notes, MMS failed too: The agency did not require testing on the shear ram or other key safety equipment.)

The training programs for MMS inspectors are “considerably out of date,” and “have not kept pace with the technological advancements occurring within the industry,” Kendall said.

In the Gulf of Mexico region, there may not be enough inspectors to begin with. According to Kendall, MMS has about 60 inspectors to cover 4,000 facilities, while the Pacific Coast has 10 for 23 facilities. (It’s worth mentioning too, that the frequency of inspections of key safety equipment such as blowout preventers was halved more than a decade ago [4].)

Edward Tenner at The Atlantic:

Remember the Ixtoc I well blowout of 1979, that released about 3.3 million barrels of oil into the Gulf of Mexico over more than ten months? Not many North Americans do — because they were less environmentally conscious, because it occurred in Mexican rather than U.S. waters, because Iran’s Islamic revolution and the Soviet invasion of Afghanistan filled the airwaves and the headlines, or even because many of today’s adults were too young to notice, or even unborn.

And that’s one of the big problems behind the BP oil spill. In 1977 the University College London civil engineers Paul Sibley and Alistair Walker published a paper suggesting that major bridge collapses occurred at approximately 30-year intervals as new designs succeeded old as a result of the failure’s lessons, new generations of designers became increasingly confident in the safety record of their innovations, until they finally pushed them over a tipping point, beginning a new cycle. The civil engineering professor and historian of technology Henry Petroski has developed this idea, which last came to the fore in the Minneapolis bridge collapse of 2007, as discussed here and here. My graduate teacher William H. McNeill coined a mordant phrase for such recurrence of disasters partially as a result of confidence in reforms, the Law of the Conservation of Catastrophe.

Bradford Plumer at The New Republic:

“The last time you saw a spill of this magnitude in the Gulf, it was off the coast of Mexico in 1979. If something doesn’t happen since 1979, you begin to take your eye off of that thing.” That was what a senior administration official recently told a McClatchy reporter, in regards to the Gulf gusher. As it turns out, this is a pattern with engineering accidents, be they bridge collapses or oil-platform blowouts. Disaster strikes, a flurry of safety improvements follow, but then engineers get over-confident in their new innovations, and eventually disaster strikes again.

[…]

As long as we stay addicted to crude, it’s hard to see us escaping this cycle—especially since we’re using up all the “easy” oil, and companies need to keep foraging deeper and deeper into the ocean, continually pushing the boundaries of safety technology.

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Porno For Regulators

Daniel Indiviglio at The Atlantic:

Senior staffers at the Securities and Exchange Commission were surfing Internet pornography when they should have been policing the financial system. A deeply disturbing SEC memo to Senator Chuck Grassley (R-IA) exposing this problem was reported Thursday night by ABC News. Here are some highlights via the Associated Press:

_A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office. He agreed to resign, an earlier watchdog report said.

_An accountant was blocked more than 16,000 times in a month from visiting websites classified as “Sex” or “Pornography.” Yet, he still managed to amass a collection of “very graphic” material on his hard drive by using Google images to bypass the SEC’s internal filter, according to an earlier report from the inspector general. The accountant refused to testify in his defense and received a 14-day suspension.

_Seventeen of the employees were “at a senior level,” earning salaries of up to $222,418.

_The number of cases jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008.

On one hand, two cases in 2007 means that either it wasn’t that widespread of a problem or it hadn’t yet been detected. On the other hand, the fact that this behavior seems to have been so prevalent among senior level employees is particularly troubling. They’re the ones who should have been closely watching the financial industry and leading the way to help prevent the system from collapsing.

A few things should be concluded from this revelation. First, government computers must need better firewalls to block out this content. Second, this is a pretty grim verdict on the effectiveness of regulators. When on the verge of the most major economic crisis in around 80 years, they were watching porn instead of the financial system.

Daniel Foster at The Corner:

It is a generality of American political discourse that, in the wake of crisis, liberals rush to creating new rules and regulations, and conservatives wonder why the current ones weren’t being enforced.

Well here’s a partial answer to the conservative question. While the financial world tumbled and the country fell into an economic abyss, Securities and Exchange Commission officials were surfing for porn.

Ann Althouse:

I wonder what people who read about this are thinking. I’ll bet a lot are outraged — and the GOP is banking on that outrage as it makes this an issue right now (because attacking the SEC is something they want to do for reasons utterly unrelated to porn). But I bet a lot of people — guys — feel really nervous about it because they are looking at porn at work too.

Marian Wang at ProPublica:

Oddly enough, news of the SEC’s porn problem is not a new revelation. In 2008, we reported [4] that the inspector general had discovered the agency’s pornography problem, and it wasn’t limited to just watching the stuff. One SEC employee went so far as to start his own private pornography business using SEC resources, “including Commission Internet access, e-mail, telephone and printer.”

So yes, it’s true that while the nation’s financial system teetered near collapse, senior staffers at a major financial regulatory agency spent hours surfing pornographic websites on the taxpayers’ dime. And it’s true that the agency’s watchdog found 31 serious offenders in the past two and a half years, 17 of whom were senior officials [5] whose salaries ranged from $100,000 to $222,000.

But the new memo also says that in the past five years, the SEC’s Inspector General conducted 33 investigations into SEC employees’ viewing porn at work. And the results of those investigations were routinely reported to Congress, and they’ve been publicly available all this time on the inspector general’s website [6].

We pointed out [4] the porn problem in a semiannual report from April 1, 2008, through Sept. 30, 2008 [7] (PDF). ABC News [8] pointed out similar findings in a report from Oct. 1, 2008, through March 31, 2009 [9] (PDF). Similar reports on porn surfing within the SEC were reported in February, first by The Washington Times [10] then blogged by The Wall Street Journal [11], The New York Daily News [12] and The Huffington Post [13], and later picked up by Gawker [14].

But this time, Republican lawmakers have taken the porn issue as an opportunity to further criticize the regulator [15]. The Associated Press quotes Rep. Darrell Issa:

California Rep. Darrell Issa, the top Republican on the House Oversight and Government Reform Committee, said it was “disturbing that high-ranking officials within the SEC were spending more time looking at porn than taking action to help stave off the events that put our nation’s economy on the brink of collapse.” He said in a statement Thursday that SEC officials “were preoccupied with other distractions” when they should have been overseeing the growing problems in the financial system.

Of late, Republicans—and notably, Issa [16]—have criticized the SEC for being influenced by politics, after commissioners voted 3-2 to sue the investment bank Goldman Sachs for defrauding investors. (The two who voted against the civil charges were Republicans, with the two Democrats—and Chairman Mary Schapiro, an Independent—voting in favor.)

David Weigel:

This strikes me as politically wise and logically garbled — the SEC, in the period covered by this investigation, was a mess at many other levels (go read Andrew Ross Sorkin on then-Chairman Chris Cox’s fumbles during the 2008 meltdown), so why attack its old behavior instead of reforming it?

Jacob Sullum at Reason:

To Be Fair, I Bet Working at the SEC Is Pretty Boring

Wonkette:

The funniest scandal of the Great Depression 2008-201? was this SEC guy fapping furiously to a transvestite porn site at work while the Wall Street/America/Earth money scam was collapsing, in August 2008. In one three-week stretch, this unnamed Securities and Exchange Commission guy employed to police the nation’s financial system went to porno sites 1,880 times. Too much? Don’t judge! And now another 30 SEC employees — including senior officials earning up to $222,000 a year — have been investigated in this federal tranny-porn inquiry. How is this Chuck Grassley’s fault?The esteemed twitterer and senator requested the summary of the investigation last night, that’s how! Fap fap fap.

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The Sacking Of The Vampire Squid

Daniel Foster at The Corner:

Breaking over at the Wall Street Journal:

SEC charges Goldman Sachs with civil fraud in structuring and marketing of CDOs tied to subprime mortgages.

Stay tuned.

Stephen Spruiell at The Corner:

There seems to be some confusion over what the Goldman Sachs-SEC lawsuit is about. This isn’t just about the fact that Goldman sold its clients some bonds and then later bet against them. In my view, that wouldn’t be so bad. Goldman would be playing two independent roles in that story — broker on one side, trader on the other — and following independent strategies to hedge against market risk. Micromanaging investment banks’ hedging strategies could have all sorts of undesirable unintended consequences.

But the fraud alleged here is more serious than that, and it concerns the way Goldman structured and sold a particular bond, a structured product known as a Collateralized Debt Obligation (CDO). These products are not like ordinary stocks and bonds, which are pretty straightforward investments. They’re made up of the cash flows of a variety of underlying assets — in this case, pools of mortgages. There was a heavy demand for these products during the housing boom, and investment banks such as Goldman were under pressure to keep churning them out. The charge against Goldman is that at least one of these products, a CDO called Abacus 2007-AC1, was built to fail.

The outside consultant Goldman hired to select which mortgages would go into the CDO, a hedge-fund manager named John Paulson, is now known as one of the most famous housing shorts ever — he made an estimated $3.7 billion betting that these kinds of mortgage-backed bonds would go bad. So it is pretty disturbing that Goldman would bring him in as an “independent manager” to help it construct a CDO and not disclose this fact to the CDO’s buyers.

It would be like holding a basketball game, letting a Vegas sharp secretly select the players on one of the teams, and then presenting it to the public as a fair game. The sharp would have an incentive to select the worst players for his team and then bet against it. According to the SEC, that is exactly what Paulson and Goldman did

Henry Blodget at Clusterstock:

Based on the scan, we have not seen any screaming smoking guns.  There is certainly evidence that Goldman and Tourre said one thing internally and another externally.  It also appears that the information that was omitted in the external marketing materials would likely have been of interest to investors.

That’s not proof of fraud, but, as represented by the SEC, it looks bad.  Goldman will want to make it go away (read: out of the headlines) as quickly as it can.

Importantly, this is NOT a criminal indictment.  It is a civil lawsuit.  The SEC and Justice Department usually work together, so the absence of a criminal charge suggests that the Justice Department did not feel criminal charges were warranted.

So here’s what’s likely to happen to both parties:

Goldman Sachs will have to write a big check, and then it will be fine: Goldman will likely say the charges have no merit and then, in a month or two, settle with the SEC for a few hundred million dollars (chicken feed).  Goldman will then defend itself against the civil lawsuits that arise from this and probably settle those as well.  There may also be follow-on lawsuits for other CDOs and products Goldman created.  Those, too, will likely be settled or dismissed.  Bottom line: This will cost Goldman some money, but not enough to matter to investors.

Fabrice Tourre will be placed on administrative leave or fired (a.k.a., thrown under the bus).  He will then spend the next couple of years testifying in this and other follow-on civil lawsuits.  The SEC will probably demand a cash settlement from him, too, and boot him out of the industry. Based on our scan of the allegations, Tourre was involved in every aspect of the structuring and marketing of the CDO in question.  The complaint includes snippets of communications in which Tourre describes the CDO one way internally and another way externally.  Again, this is not proof of fraud, but, at least as represented by the SEC, it looks bad.  Tourre will likely want to fight the charges, especially if he thinks they’re b.s., but it will be too risky and expensive for him to do so, so he’ll likely settle.  Having made such public allegations, the SEC will make sure that any settlement produces an appropriately tough-looking headline (thus the fine and industry dismissal).

Felix Salmon:

With this suit, the SEC has finally uncovered the real scandal behind the Abacus deals. The NYT tried, back in December, but it didn’t quite get to the nub of the story — although Paulson was mentioned in the NYT story as someone who was generally short the subprime market, there was no indication that he played any role in structuring the deals. Neither was there any mention of ACA.

The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.

Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale.

Update: The Abacus pitch book can be seen here.

Naked Capitalism

Jesse Eisinger and Jake Bernstein at ProPublica

Matt Taibbi:

Goldman, Sachs is getting busted, finally, for what to me is one of the most devious and brilliant crimes of the last decade.

I can’t get into this too much because I have other material coming out about it. But the upshot of it is that GS teamed up with a hedgie named John Paulson (no relation) to make the biggest ball of subprime shit they could, got short of it by credit-default-swapping it, then roped third parties into buying it. It’s kind of awesome in a way, and I’m sure it was fun while it lasted.

But now… I’m reminded of the scene in Goodfellas when the cops bust Henry…:

Bye bye, dickhead!

Megan McArdle:

One wants to be cautious about saying that Goldman Sachs is definitely guilty.  Financial crises produce immense political pressure for securities regulators and attorneys general to go head-hunting, and the cases often turn out to be weaker than they seem once the defense gets a chance to speak.  The case against two Bear Stearns hedge fund managers, for example, turned out to hinge on horrific-sounding quotes that had very clearly been ripped out of a context that totally changed the implications. Which just goes to show how heavy the pressure is on prosecutors to make these cases.

But it certainly sounds as if the SEC has the goods here.  Felix Salmon has gone through the pitchbook, and pronounces it free of any indication that a third party with a strong economic interest in the transaction was picking the securities to be included.  I will be interested to hear the defense rebuttal.  It should, at the very least, be entertaining.

Was anyone hurt by it?  That’s less clear–at that point, the market still had a bit of froth left, and people might well have bought the securities if Paulson’s interest had been disclosed.  But that doesn’t matter.  It’s hard to imagine anyone making an argument that Goldman didn’t have an obligation to disclose this information–and the fact that they failed to disclose seems to indicate that Goldman, at least, thought that the information would adversely impact the sale price.

I suspect this case will get a lot of public traction.  At this point, what galls people is not so much the stupid behavior that led to the bailouts, but the blatant self-dealing that seems to have gone on.  Unfortnately, much of that self-dealing is not actually illegal . . . so when we find an example that is legally actionable, the public and the court system are bound to jump on it with both feet.

Atrios

Stephen Gandel at The Curious Capitalist at Time:

So there you have it. Finally, the financial crisis gets its first major fraud case. Investment banks created complex securities that increased the risks of in the financial system. Most then held on to the securities because they didn’t know what they had. Goldman instead came up with an elaborate scheme to lay off the risk on unsuspecting investors. Either way, Uncle Sam had to come in a clean up the mess. As the SEC says, in selling something they knew was worthless, Goldman was no different from the medicine man of old. It’s a fraud as old as time.

The first question was who was damaged here. The answer is all of us. First of all, the investors who bought the securities lost about $50 billion on them $1 billion. (That’s the figure for the deal in question by the SEC. But I believe if you figure in all the deals synthetic deals that Goldman set up the investor loss is much larger.) Those investors were mostly pension funds. Second, Goldman insured these purposefully useless mortgage bonds with AIG. So all of us, taxpayers that is, had to pay up for those losses when AIG had to be bailed out. So this suit is really just a case of the government trying to get its money back from Goldman. That’s something we should see more of.

Two more questions: Does this end Blankfein’s reign as head of Goldman? I think so. It’s a big deal for an investment bank to be charged with securities fraud. And it is not just a coincidence that Goldman would get hit with a fraud case when Blankfein was CEO. Even though he is not named in the complaint, Blankfein is to blame. He pushed the firm to become less of an investment bank and more of a trading behemoth.  And this is the result: A brilliant trade that was so brilliant the Goldman people forgot that it also might be fraud.

Last: So are hedge funds more to blame in the financial crisis than we thought? It certainly looks that way. When the hedge funds went before Congress a year or so ago, they were praised–Paulson included. Now it looks like Paulson masterminded a trade that cost the government tens of billions of dollars. I would hope his next Congressional meeting will be less pleasant.

Lucas van Praag at Goldman Sachs:

The Goldman Sachs Group, Inc. (NYSE: GS) responds to a complaint filed by the SEC today.

The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

UPDATE: David Goldman (Spenger) at First Things

Eli Lehrer at FrumForum

Paul Krugman at NYT

Tom Maguire

Marian Wang at ProPublica

UPDATE #2: Goldman settles. Felix Salmon

Naked Capitalism

Daniel Indiviglio at The Atlantic

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