The National  Memo Logo

Smart. Sharp. Funny. Fearless.

Monday, December 09, 2019 {{ new Date().getDay() }}

How An Obscure Federal Rule Could Be Shaking Up Presidential Politics

by Jake Bernstein, ProPublica.


New Jersey Gov. Chris Christie’s allies seemed to give a big old raspberry to presidential aspirant Mitt Romney on the front page of the New York Post. Anonymous sources told the paper that Romney demanded Christie agree to resign the governorship if he was offered vice president on the GOP ticket. Christie was said to have declined since he didn’t think Romney would win.

A spokesman for Christie said they were not commenting on the Post’s report and suggested contacting the Romney campaign, which did not respond to emailed questions.

The possible need for Christie’s resignation arises from federal rules that forbid the employees of Wall Street firms from giving money to state officials running for federal office if the firms do business with that state. The rules affect firms that underwrite municipal bonds or advise state pension systems on their investments. If the public official — in this case, the governor of New Jersey — has any influence, directly or indirectly, in selecting the pension investment advisers or bond underwriters, the firms can’t give campaign contributions.

As governor of New Jersey, Christie, ultimately through a complicated process, appoints nine of the 16 members of the state investment council that chooses investment advisers. This would likely trigger the investment advisor rule and would have cut off an important spigot of campaign cash for Romney.

This is the first presidential election where the state pension adviser rule, which was passed in 2010, is in effect. It has the potential to make it more difficult for sitting governors to run for federal office. The municipal bond rule, which operates similarly, has been in place since 1994. It posed a challenge in 2004 when Alaska Gov. Sarah Palin was selected by Sen. John McCain, R-Ariz., according to Ken Gross, an attorney with law firm Skadden, Arps, who advises firms on how to navigate the rules.

Gross said that some companies were banned from doing bond business with Alaska for violating the provision. Under the rule, the ban lasts for two years.

The pension investment adviser rule potentially covers many more firms and employees than the rule for bond underwriters.

Louisiana Gov. Bobby Jindal, who was also rumored to be on Romney’s list of potential VP candidates, would also likely be covered under the rules. It’s not clear if a similar request was made of Jindal. We reached out to Jindal and will update this post when his spokesman responds.

One governor who is frequently discussed as a presidential candidate in 2016 is New York’s Andrew Cuomo. Gov. Cuomo might expect to be a big recipient of campaign contributions from Wall Street since many investment firms are headquartered in his home state. But he would also not have to worry as much about the investment adviser rule, according to a spokesman. New York is what is called a “sole trustee” state. The state comptroller makes most investment decisions for the pension funds. But the governor still has appointing authority for many of the state entities that issue bonds such as the Metropolitan Transit Authority.

Two Wall Street Players Ensnared In New Probe

by Jake Bernstein, ProPublica

More than three years after the financial crisis, Wall Street watchdogs are still uncovering questionable actions rooted in that time. The latest revelation involves one of the more creative packagers of securities who contributed to a trail of billions in soured deals, as well as a much-maligned rating agency.

The Financial Industry Regulatory Authority — an independent, non-governmental regulatory body — has recommended disciplinary action against two men for “alleged misrepresentations in connection with the sale” of a complex security.

The recommendation is preliminary. No civil or criminal charges have been filed.

The men, Alexander Rekeda and Timothy Day, are both affiliated with Guggenheim Capital, a privately held, financial services company that does everything from trading securities to providing investment advice. According to its web site, the firm, headquartered in New York, has 1,700 employees in 25 offices located in 10 countries, and it manages about $125 billion.

A lawyer for Rekeda could not be reached for comment. ProPublica has learned that he is no longer with Guggenheim. Day, who is still at Guggenheim, did not respond to a request for comment. We will update this post when they are reached.

FINRA has been investigating the men over the sale of a type of security known as a collateralized loan obligation, or CLO. The investigation touches on a CLO called Nine Grade Funding II, although it remains unclear if this CLO is the main focus of the probe. FINRA’s filing did not elaborate on the type or character of the “alleged misrepresentations” it said were involved in the sale of the CLO it is investigating.

In a story published Monday evening, the Wall Street Journal reported that Rekeda was under investigation by FINRA for an unnamed CLO. The Journal also reported that Rekeda is being investigated by the Securities and Exchange Commission for a collateralized debt obligation, or CDO, he helped construct while employed by the Japanese bank Mizuho.

As we detailed in our series the Wall Street Money Machine, Rekeda was involved in the creation of several CDOs with Magnetar, a hedge fund that helped put together more than $40 billion of the securities. Magnetar often lobbied for riskier assets to be put into the CDOs and then placed bets against many of the investments, reaping tremendous profits when the deals soured. (Magnetar has never been charged with any wrongdoing, and has always maintained that it did not have a strategy to bet against the housing market.) The investigation into Rekeda is one of the few public signs that regulators are considering charges against a top banking executive involved in a Magnetar deal.

Nine Grade Funding was a CLO comprised of other CLOs backed by corporate loans. It was issued at a time when few such securities were being sold. The CLO was featured prominently in allegations by a whistleblower, Eric Kolchinsky, against the rating agency Moody’s. Kolchinsky alleged that Moody’s allowed bonds to be added to the CLO in January 2009 and that it allowed the CLO to keep its previous rating. Moody’s took these actions, according to Kolchinsky, despite plans already in the works by the rating agency to downgrade all such securities. Moody’s denied the allegations. After Kolchinsky was forced out of the firm, he testified about the deal before the House Committee on Oversight and Government Reform.