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More Corruption: Dodd’s Chief Counsel Bought Financial Stocks During 2008 Crisis

 

Dodd’s Chief Counsel Bought Financial Stocks During 2008 Crisis

By Robert Schmidt

March 18 (Bloomberg) — Senate Banking Committee Chairman Christopher Dodd’s chief counsel in 2008 traded stock in Morgan Stanley, Wells Fargo & Co., American International Group Inc. and other rescued companies as the panel considered legislation to address the credit crisis, according to her financial disclosure form filed with the Senate.

Amy Friend, 51, who is now leading the panel’s effort to write a bill overhauling Wall Street regulations, bought $1,000- to-$15,000 stakes in four banks, weeks after Dodd hired her in January 2008, the form shows. She also owned shares of Fannie Mae, Freddie Mac, AIG and other insurance firms, according to the disclosure document, which she signed on June 5, 2009.

The transactions, permissible under Senate rules, included buying $1,000 to $15,000 of Federal Home Loan Bank bonds and Fannie Mae debt in June and July, 2008. On July 30 of that year, then-President George W. Bush signed into law a Dodd-sponsored bill setting out new regulations for the housing finance agencies and allowing the Treasury Department to give them cash injections.

“This looks very bad,” said Melanie Sloan, the executive director for Citizens for Responsibility and Ethics in Washington and a former Democratic congressional aide. “At the very least it’s inappropriate and it gives the appearance of wrongdoing, even if there is none.”

Ethics Committee

Dodd, a Connecticut Democrat, defended his chief counsel. “Amy Friend is one of the fiercest public advocates on Capitol Hill today,” Dodd said in an e-mailed statement. “Her integrity is second to none.”

Friend, who declined to comment, informed her supervisor of her holdings, and consulted the Senate Ethics Committee when she was hired, Kirstin Brost, the Senate Banking Committee spokeswoman, said.

Friend lists the investments as jointly owned with her husband. She continues to hold financial securities, Brost said. Friend’s disclosure form for 2009 is due in May.

Sloan and other ethics specialists say Friend’s stock ownership and trading reflect the leeway lawmakers and congressional staff have with their investments. Unlike Treasury Department employees or bank examiners at independent regulatory agencies who aren’t allowed to hold shares of companies they oversee, U.S. lawmakers and their staff are free to invest with few restrictions.

Still, Friend’s counterparts on the banking panel’s Republican side and on the House Financial Services Committee didn’t own financial instruments, according to their 2008 disclosures.

‘Squishy’ Rules

The rules “are kind of squishy intentionally,” said Kenneth Gross, a partner at the Skadden, Arps, Slate, Meagher & Flom LLP law firm in Washington who counsels people on ethics regulations. “Congress has permitted the holding and trading of securities virtually unfettered.”

Senate rule 37 states that no lawmaker or employee “shall knowingly use his official position to introduce or aid the progress or passage of legislation, a principal purpose of which is to further only his pecuniary interest.”

In additional guidance, the Senate Ethics Manual notes that the restriction is “narrow” and says that if the legislation has broad impact, a prohibition wouldn’t apply.

The rules require staff that have “substantial holdings” that could be directly affected by a committee’s work to divest, unless they are given a waiver by the Senate Ethics Committee.

The ethics panel has told congressional staff that a fair definition of “substantial” would be any single holding equal to 3 percent to 5 percent of total liquid assets. Friend’s combined financial investments constituted less than 2 percent of her liquid assets, below the ethics guidance, Brost said.

‘Not Unethical’

John Hasnas, who teaches ethics as an associate professor at Georgetown University’s McDonough School of Business in Washington, said that while her actions may not look good politically, “the fact that it may appear unethical to others doesn’t mean what you did was wrong.”

“If the rules say that she is allowed to do it and the only problem is that it gives the appearance of impropriety, in my opinion she has not behaved unethically,” Hasnas said in a telephone interview.

It is impossible to tell the exact amount of Friend’s purchases and sales from the ethics records, which require her to value investments only in broad ranges.

She listed each of her financial stocks as being worth $1,000 to $15,000. They included: AIG, Bank of America Corp., Bank of New York Mellon Corp., Discover Financial Services, Freddie Mac, Fannie Mae, Federated Investors Inc., M&T Bank Corp., Wells Fargo, MetLife Inc. and MGIC Investment Corp., a mortgage insurer.

Company Stocks

Friend’s portfolio included stocks of more than 100 companies, many non-financial, ranging from Coca-Cola Co. to Target Corp. to Xerox Corp. She also owned mutual funds, municipal bonds and Treasury bills.

Friend was an attorney at the Office of the Comptroller of the Currency before joining the banking committee. She also teaches a spinning class at a Northern Virginia gym in her spare time, earning $1,200 in 2008.

Friend’s first year working for the panel included the near-collapse of Bear Stearns Cos., the bankruptcy of Lehman Brothers Holdings Inc., the government bailouts of AIG, Fannie Mae and Freddie Mac, and passage of the $700 billion financial rescue law.

The committee also considered the Housing and Economic Recovery Act, which provided foreclosure assistance to struggling homeowners, created a more powerful regulator for the home loan banks and Fannie Mae and Freddie Mac, and gave the Treasury emergency authority to bail out the housing-finance giants.

Fannie Mae Shares

On July 23, as lawmakers neared agreement on the bill, shares of Fannie Mae rose 12 percent to close at $15 in New York Stock Exchange composite trading. Friend’s own Fannie Mae stock holdings would have increased in value as well, though not enough to cover steady declines since she acquired the shares on January 23, when they closed at $34.78

Friend also made five purchases of Federal Home Loan Bank Board bonds in 2008, each valued at $1,000 to $15,000, according to the form. Two were in January, one in February, one in March and one in June of that year. Friend valued her total holdings of the bonds at $50,000 to $100,000, according to the form.

She also purchased Fannie Mae debt on July 1, two weeks before the bill, sponsored by Dodd and Senator Richard Shelby of Alabama, the senior Republican on the banking committee, passed the Senate.

Bank of America

Some of Friend’s trades listed in the disclosure statement were stock purchases — all in 2008 — and may not have been profitable. For example, when she bought Bank of America on Feb. 20, its closing share price was $42.97. She acquired additional shares on May 27, when the closing price was $34.17. It was $17.03 a share at yesterday’s close.

Friend purchased AIG on Aug. 12 when its closing share price was $457. About a month later, the firm received an $85 billion loan from the Federal Reserve, the first of several bailouts. AIG shares closed yesterday at $33.61 a share.

Very few of the trades in Friend’s portfolio were sales. She did unload $1,000 to $15,000 of Morgan Stanley shares on Sept. 22, several days after then-Treasury Secretary Henry Paulson asked Congress to pass the Troubled Asset Relief Program designed to remove toxic debt from banks’ books.

–Editors: Brendan Murray, Paula Dwyer

To contact the reporter on this story: Robert Schmidt in Washington at [email protected]

To contact the editor responsible for this story: Christopher Wellisz at [email protected]

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