Skip to content
 

The Waters Outside Counsel and the September 9, 2008 Treasury Meeting (Part 2)

Now let us turn to one of the two key issues in the Waters ethics case: whether Representative Waters violated any ethics rules when she called Treasury Secretary Paulson to arrange the September 9 meeting.

Outside Counsel’s ability to analyze this question is compromised by its unwillingness to confront the reality of what happened at the September 9 meeting, as described in my last post. Outside Counsel treats the matter as if NBA (the minority bank trade association) had approached Waters and asked her to set up a routine agency meeting on an issue that widely affected its membership. Based on that framing of the issue, Outside Counsel concludes that there was nothing inappropriate (or even questionable) about Waters’ actions.

Unfortunately, this is not what happened. Waters was not approached by NBA professional staff, or by a group of minority banks, but by two senior officials of a single bank, OneUnited (in which her husband happened to own $350,000 worth of stock). Nor was she merely asked to set up a routine meeting, but to call the Treasury Secretary personally. This is obviously not an everyday constituent service (Waters stated in her OCE interview that “you don’t use your chits for nothing, you call when there is an important issue”) and Outside Counsel does not cite any evidence that Waters had ever arranged a similar meeting for anyone else.

Moreover, Waters must have understood that OU stood to benefit from the meeting that she was arranging. Although Outside Counsel cites her testimony that neither OU CEO Kevin Cohee nor OU Senior Counsel Robert Cooper specifically referenced OU’s financial issues when she met with them (separately) on September 8 (see Report at 84), it strains credulity to suggest that Waters did not understand that OU itself had a financial exposure to the GSEs. After all, OU had been in contact with Waters’ office since at least August 22 regarding this issue, and it was the only bank that had apparently contacted her.

Cooper’s September 6 letter to Paulson, which was copied to Waters, stated “we are simply seeking a return of the money we invested in the GSEs.” Outside Counsel notes that this letter purports to be on behalf of NBA and does not specifically mention OU, but it cites no evidence to suggest that Waters did not understand that “we” included OU itself. Indeed, it acknowledges that Waters was copied on another September 6 letter, sent by a Massachusetts State Senator on OU’s behalf, that makes OU’s financial exposure to the GSEs explicit. Report at 80 n. 360.

It does not appear that Waters denied understanding that OU’s own financial interests were at stake, and any such denial would be difficult to credit. She testified that when she met with him on September 8, Cooper “was in a panic saying that all the minority banks were in deep trouble.” Report at 82. Surely she did not interpret this as meaning that “all” the banks except OU were in trouble.

Outside Counsel does not cite any testimony from Waters directly addressing her knowledge regarding OU’s exposure to GSE stock. Given that Waters’ husband was on the OU Board for many years (presumably at the time when many of these shares were purchased), as well as the circumstances described above, it would have been very odd if Outside Counsel assumed, without asking, that Waters was unaware of OU’s financial situation.

Outside Counsel rests its analysis on the fact (which is not disputed in the record) that Cooper and Cohee presented the issue to Waters as one that affected minority banks in general. Yet even if Waters accepted that representation at face value, it would have been unreasonable to assume that all banks were affected equally. In the first place, common sense would suggest that any bank’s exposure to GSE stock would vary depending on its individual business decisions. Although Cooper and Cohee suggested that the government encouraged minority banks to purchase GSE stock, they did not claim that banks were required to make such purchases, nor that banks that made such purchases did so to an equal degree.

Cooper’s September 6 letter acknowledges that all minority banks are not situated equally. While requesting that all minority banks be reimbursed for their GSE shares, he states that “[a]t a bare minimum, we urge the GSE resolution to include a provision that any minority bank that fails due to its investment in GSE preferred stock would simply have its investment returned.” Again, it would have been very odd to assume that OU was not among those banks in danger of failing due to exposure to GSEs.

Under these circumstances, the questions that Outside Counsel should have asked (but apparently did not) include: (1) given that Waters was approached only by OU officials, should she have inquired of NBA’s professional staff, or of NBA officials affiliated with other banks, or of other banks directly, as to the scope of the problem or whether they supported OU’s request?; (2) should she have asked Cohee or Cooper themselves if others supported or were aware of their request?; (3) should she have asked them if they could identify specific banks, other than OU, that would be affected?; and (4) should she have made any efforts to determine if OU was uniquely or disproportionately affected by the issue before contacting Paulson?

Other questions not asked relate to Waters’ telephone call to Paulson. Outside Counsel suggests that the record was “unclear” as to whether Waters merely related to Paulson the information conveyed to her by the OU representatives, or whether she personally vouched for or endorsed this information. Report at 128 n. 663. Paulson’s testimony suggests the latter, as he testified “she really was quite aggressive with me—and I think in a very appropriate way—saying that, you know, there are banks and minority banks that have bought preferred stocks of government-sponsored enterprises thinking they were going to be money-good; now . . . you’ve taken this step and wiped them out, and so she was concerned about that.” Report at 85. If Outside Counsel were “unclear” whether Waters appropriately exercised care before adopting OU’s factual assertions (as the Ethics Manual indicates that she should), one would think it would have inquired of Waters on the subject.

In addition, while Outside Counsel stresses the fact that Waters properly disclosed her financial connections to OU on her disclosure forms and at a congressional hearing, see Report at 130 n. 671, it ignores the fact that she did not disclose them to Paulson. The former Treasury Secretary told OCE that Waters “indicated that she had some people in town who were important to her” and said “they needed a sit down with the Treasury Department.” Paulson was “unequivocal” that Waters did not mention her financial connections to those people or to OU.

True, Paulson testified that he would have granted the meeting even if the disclosure had been made. But it seems likely that both he and Waters would have been sensitized to the need to ensure that the meeting included more banks than just OU, thereby mitigating the appearance of impropriety.

Here is how the Waters Committee summarizes Outside Counsel’s recommendation, which the committee accepts, with regard to the September 9 meeting:

While it appears that all of the minority bankers who attended the meeting were associated with OneUnited, and that OneUnited was alone in requesting substantial financial assistance from the Treasury Department at the meeting, the record indicates that Representative Waters did not have reason to know of either of these facts when she arranged the meeting. Accordingly, Outside Counsel recommended that the Waters Committee find that Representative Waters reasonably believed she was arranging the Treasury meeting on behalf of a broad class of minority banks, and that in doing so she did not violate any House rule, law, regulation, or other applicable standard of conduct.

Waters Committee Report at 7.

The problem is that the record contains quite a bit of evidence suggesting that Waters did have “reason to know” that OU was alone in requesting the meeting and seeking “substantial financial assistance” from the Treasury Department. It also contains evidence suggesting that it was not so reasonable for Waters to accept OU’s claims regarding the broad impact on minority banks at face value.

Perhaps, considering all of the circumstances (ie, being approached by people she trusted with claims that numerous minority banks faced an imminent threat of collapse), it was reasonable for Waters to respond in the way that she did. Perhaps her handling of the situation, though sub-optimal, can reasonably be excused as the result of inadvertence that did not rise to the level of an ethics violation (or that any violation was not serious enough to warrant discipline). I am not suggesting that Outside Counsel was required to recommend that the Waters Committee move forward with the case.

However, because Outside Counsel never asked the questions relevant to determining the reasonableness of Waters’ actions, it is difficult to take seriously its conclusions in this regard. This is particularly so because Outside Counsel apparently (as far as I can tell from the report) never even deposed or interviewed Waters, but simply relied on her testimony before the OCE and the prior Investigative Subcommittee. Thus, its report seems to stand for the blanket proposition that a Member take action at the request of an entity in which she has a financial interest, so long as the entity assures her that the action will benefit a wider class.

Perhaps recognizing that Outside Counsel’s “see no evil” approach might set a bad precedent in future cases, the Waters Committee makes certain comments which were probably intended to qualify Outside Counsel’s apparent endorsement of Waters’ conduct. For example, while Outside Counsel points to the fact that Waters had long supported minority banks as a justification for her actions, see Report at 129, the Waters Committee suggests that this role actually made the need to avoid conflicts more acute. See Waters Committee Report at 16-17 (“the more likely it is that an entity in which a Member holds a financial stake will come to that Member’s office for assistance, perhaps because of their leadership positions and relative influence, the more that Member must make sure to prevent such conflicts.”)

I doubt, however, that this will do much to slow down defense counsel in future ethics cases. After all, if Stan Brand thought the Graves precedent justified Waters’ conduct here, can you imagine what he will do with this precedent?

Leave a Reply