Recusal Confusion- A Final Post on the Waters Case

Now I will turn to the other major issue in the Waters case, which relates to Outside Counsel findings that (1) Representative Waters properly recused herself and her office from the OneUnited matter following the September 9, 2008 meeting, and (2) Mikael Moore, her chief of staff (and grandson), violated her instructions and improperly remained involved in the OU matter. As discussed below, both of these conclusions are problematic.

Following the September 9 meeting, Waters realized that her involvement in OneUnited Bank’s “asking for money” would present a conflict of interest or appearance of impropriety. This realization was likely triggered by (1) a telephone call from Treasury Secretary Paulson and (2) learning what had transpired at the September 9 meeting.

Paulson called Waters on September 10 to express his disappointment that OU was the only bank represented at the previous day’s meeting. This may have alerted Waters to the possibility that OU’s claims of acting on behalf of all minority banks were, shall we say, exaggerated. It also probably dramatized the political/ethical appearance problem created by her arranging the September 9 meeting. After all, if Paulson (who had a few other things on his plate at the time) was sufficiently disturbed about the meeting to call Waters personally, it would take little imagination to envision how the situation would look in the press, particularly in light of Waters’ financial and other ties to OU.

Waters also learned that OU had explicitly asked for a $50 million buyback from the Treasury Department during the September 9 meeting. In some sense, this should not have been a surprise in light of Robert Cooper’s September 6 letter to Paulson, which explicitly stated “we simply are seeking a return of the money we invested in the GSEs.” If OU’s $50 million request was jarring to Waters, it was probably because (1) she had not previously considered the optics of OU making a specific request on its own behalf (particularly in the context of a meeting at which no other banks were represented) and (2) it brought home the magnitude of OU’s GSE exposure, both in absolute terms and in relation to other minority banks.

The evidence supports these hypotheses. Waters testified that her attitude toward the situation changed when she understood that OU was “asking for money.” Report at 97. Previously “I didn’t know or understand the implications of that.” Id. (emphasis added). This suggests that Waters’ evolving position had as much to do with looking at the situation from a different perspective (ie, from the perspective of OU’s prospective financial benefit) as from receiving new information.

Moreover, when Waters expressed her concerns to then-Financial Services Committee Chairman Barney Frank, she focused on the fact that OU’s exposure to GSE stock was significantly greater than other similarly situated banks. According to Frank’s testimony before the OCE, “the problem Representative Waters referenced was the fact that OneUnited had purchased more preferred shares of Fannie Mae and Freddie Mac than any other bank.” Thus, while many banks (including small non-minority banks) were negatively affected by the GSE conservatorship, OU had an “exaggerated version” of the problem that left it at “greater risk of collapse than any other bank.”

While this explains Waters’ change of heart, it does less to illuminate the ethical standard that should have guided her conduct. Outside Counsel explains that “Representative Waters’ decision that she could arrange for a meeting between representatives of the NBA and Treasury, but should not later advocate to Treasury solely on behalf of a bank in which she had a financial interest was an appropriate interpretation of the rules and standards of conduct relevant to use of a Member’s office for personal benefit.” Report at 130.

But what does the word “solely” mean in that sentence? OU never argued for a benefit “solely” for itself, but rather for a bailout that would apply to all minority banks that risked failure due to exposure to GSE stock. Was Waters prohibited from advocating such a bailout once she realized that OU would be a primary beneficiary, or the primary beneficiary, or possibly the sole beneficiary? Or was she merely prohibited from arguing to Treasury “on behalf of” OU alone? If the latter was the case, why could she not have continued to advocate “on behalf of” NBA since, at least theoretically, the proposal presented to Treasury in the September 6 letter and at the September 9 meeting was an NBA, not simply an OU, proposal?

Outside Counsel uses various verbal formulations to express what Waters was not supposed to do. It refers to advocating “solely on behalf” of OU (Report at 130-31), assisting OU “to directly receive money” (Report 131), acting to “specifically assist” OU (Report at 133), assisting OU “in its own narrow attempt to secure funding” (Report at 134), and assisting OU “in its attempt to directly obtain money.” (Report at 135). But these formulations appear designed to evade, rather than answer, the questions identified above.

One might say that Waters should have prohibited OU from lobbying or seeking assistance from her office entirely. In that case she would have directed her staff not to assist OU at all, and to refer any OU inquiries to other Members of Congress (presumably in the Massachusetts delegation, since OU was headquartered in Massachusetts). Indeed the Waters Committee suggests as much, advising that staff should “be instructed to inform any entities in which the Member has a financial interest, to direct their specific requests for assistance to another Member or committee.” Waters Committee Report at 16.

But Waters did not do this, either before or after the September 9 meeting, and Outside Counsel finds no fault in her failure to do so. According to the testimony of OU Senior Counsel Cooper, “he would contact Representative Waters on issues impacting One United because the bank operated a branch in her district.” Report at 74. Outside Counsel appears to accept that there was nothing inappropriate about this, and it suggests (dubiously, in my view) that Waters could properly perform constituent service for OU because it, like other minority banks, served her district. Report at 129.

Moreover, even after the September 9 meeting, Waters did not direct her staff to cease providing assistance to OU. Instead, Waters related to Moore, her chief of staff, a conversation that she had had with Chairman Frank. In this conversation, according to Frank, Waters explained OU’s problem and indicating that she was in a difficult position because of her relationship to the bank. Frank advised her to “stay out of it” and said that he would address OU’s problem because OU “was a Boston bank and he had a commitment to minority banks.” Frank then “asked his staff to take over the OneUnited issue from Representative Waters.”

Exactly how Waters presented this conversation to Moore became a significant issue in the Outside Counsel’s investigation. Outside Counsel placed considerable reliance on a version of the event presented by Waters at a press conference, which seems somewhat peculiar given that Waters gave a statement to the OCE and was deposed by the Investigatory Subcommittee. It does not appear that Waters mentioned this episode in either testimony, and I question whether Waters even has a personal recollection of her conversation with Moore (in her OCE statement, she only mentioned the conversation with Frank, and stated she had no recollection of the specifics of that conversation).

For present purposes, however, I will assume that this press conference statement accurately depicts the conversation with Moore: “I told my chief of staff that I had informed [Frank] about OneUnited Bank’s interest, that we were only concerned about small and minority banks broadly, that [Frank] would evaluate OneUnited’s issue and make a decision how to proceed.” Report at 99-100.

Note what this statement does not say. It does not say that she instructed Moore to cut off further communications with OU. It does not say she told OU (or instructed Moore to tell OU) to communicate only with Frank’s office regarding the matter. It does not say that she said anything at all to the rest of her staff (or instructed Moore to say anything to the rest of the staff) about any conflict of interest with regard to OU. Thus, even taking this press statement at face value, it seems difficult to construe it as a general recusal with respect to OU.

Following this conversation, Frank’s committee staff did in fact take the lead both in dealing with the Treasury Department and in crafting legislation which ultimately enabled OU to obtain the capital infusion that it needed (partially from Treasury funds and partially from private sources). OU, however, continued to communicate with Moore, who would then reach out to the committee staff to pass on OU’s concerns, monitor developments, and encourage them to move forward with a resolution.

As far as I can tell, Moore’s actions were consistent with what he had been told by Waters. When Waters was shown emails from OU to Moore at her deposition, she testified that she was not surprised by these communications, and she did not testify that she had prohibited such continuing communications with OU. Report at 106. Nor did she testify that Moore was prohibited from communicating with the committee staff regarding these matters. To the contrary, it would seem like a reasonable interpretation of the Frank/Waters/Moore conversations that Frank’s staff would take the lead on the OU issue and that Moore would look to them for information on how it would be resolved. Neither Waters nor Frank attempted to create a firewall to prevent their respective staffs from communicating with each other on any issue.

Arguably, Moore should have limited his role to a strictly informational one, merely monitoring the progress of Frank’s staff without providing any substantive input on how the issues should be handled. There is, however, no evidence that is what Waters intended, much less that she communicated such an instruction to Moore.

Furthermore, the evidence shows that Waters became personally involved in the legislative provision that Frank’s staff drafted to address OU’s problem. Frank directed that this provision, which was ultimately enacted as section 103(6) of the TARP legislation, be included in the draft legislation when it became apparent Treasury was not going to accept the “NBA proposal” made at the September 9 meeting. Report at 108-111. There seems to be no dispute that this provision was drafted specifically to address OU’s problem, although it was expected that other banks would be able to use it as well. Report at 115.

An email from Moore to the committee staff on September 28, 2008 indicates that Waters reviewed this provision, made comments on it, and insisted that it be included in the final draft produced for committee consideration. According to Outside Counsel, there was nothing inappropriate about these actions because “the record supports the conclusion that [section] 103(6) was drafted to assist a larger community of banks, of which OneUnited was a member.” Report at 135 n. 695.

But the record seems clear that section 103(6) was drafted specifically to address the very issue that Waters handed off to Frank following the September 9 meeting. Frank said that he would consider OU’s problem and decide how to proceed, and, after it became apparent that Treasury was not going to act on the proposal made at the September 9 meeting, he directed that section 103(6) be included in the bill as an alternative means of resolving the problem. If Waters did not believe that she was recused from reviewing, commenting on and supporting this legislative provision, presumably she expected that her staff would at least be monitoring the progress of the legislation.

Given this, it is extremely difficult to see how Outside Counsel can fault Moore for what appear to be basically innocuous communications with the committee staff in which he passed on concerns he had received from OU. There is absolutely no reason to believe that these actions violated any instructions Moore had received. If Outside Counsel believed that Moore should have been directed not to communicate with OU and/or with committee staff, it would seem that Waters, not Moore, would be responsible for this lapse.

At the end of the day, Outside Counsel seems to have little problem with the substantive role that Waters and her office played in assisting OU to obtain millions of dollars of taxpayer money, so long as they avoided the “appearance” of doing anything specifically for OU. In other words, the letter of reproval Moore received from the Ethics Committee wasn’t for being dishonest; it was for not being dishonest enough.


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