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IMF Warns on U.S. Subprime Lending, While Praising Its Global Spread

Byline: Matthew Russell Lee of Inner City Press at the UN

UNITED NATIONS, April 10 -- The International Monetary Fund, while singing the praises of financial globalization in a report issued today, notes dryly that "the subprime sector of the U.S. mortgage market has deteriorated more rapidly than had been expected." What the IMF misses is that the same subprime lending scheme which began in the U.S. and is now embroiled in bankruptcies and criminal charges, is being expanded worldwide by the Large, Complex Financial Institutions which the IMF loves and serves.

            Citigroup, for example, brags of aggressively expanding its subprime CitiFinancial business to more emerging markets countries. General Electric's GE Money unit doesn't brag, it just expands, offering high-rate lending in every continent. The American Insurance Group, which bought a subprime lender along with American General, seeks to spread the subprime model throughout its global franchise. HSBC, even while announcing earnings warning about its U.S. business, has exported the questionable Household International business model to Eastern Europe, Latin America and elsewhere.

            One of the IMF's conclusions is that "Policy makers need to make sure that ongoing oversight of internationalized financial institutions is effectively coordinated cross-border." But on the issue of subprime lending, the U.S. Federal Reserve while approving yet another Citigroup acquisition has ruled that "claims about lending activities in India... are either outside the jurisdiction of the Board" or "contain no allegations of illegality or action that would affect the safety and soundness of the institutions involved in the proposal, and are outside the limited statutory factors that the Board is authorized to consider when reviewing an application under the [Bank Holding Company] Act."  87 Federal Reserve Bulletin 9, n.61 and next FRB approval.

IMF in DC

            The IMF's "Global Financial Stability Report" notes that "the increase in foreign ownership has been particularly rapid in Easter Europe and in Latin America." A table is included, comparing the percent of banking assets under foreign ownership in 1995 and 2005. In Latin America, this jumped from 18% to 38%, with Spain beating out the U.S., 24% to 10%.  In Eastern Europe, foreign ownership of banking assets leapt from 25% to 58%. The report drills deeper, and uses global owners' names, with respect to Central and Eastern Europe. In the mix is GE Money, Citi, SocGen and others. In "Emerging Asia," the U.S. is Number One outsider, with 10% of Taiwan's and 5% of Thailand's market. The UK tops out in Malaysia, with 12.5% of the market. But what of Lone Star's ill-fated investment in South Korea?

            The IMF's report's third chapter, "Globalization of Financial Institutions: Financial Stability Implications," speaks of regulators' "war games" --

a number of national authorities have been undertaking financial crisis simulation exercises, both domestically and (especially in Europe) jointly with other countries' authorities.... Lessons from the 'war games' in Europe point to the priority areas for further effort. These include, in particular, clarification of legal access to collateral and other assets; further development and testing of domestic crisis management arrangements between supervisors, the central bank, and the finance ministry; and continued cross-border crisis management exercises to further build relationships, contacts, and, more fundamentally, a common understanding of the issues involved, even if there is no specific agreement on how to approach crisis resolution.

  These war games, the IMF discloses in a footnote, have not included the private sector. It's akin to naval simulations without ships, navel-gazing, in essence. Where is the next global New Century? We'll soon see.

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At the World Bank, Corruption-Fighting Claims Not Fully Matched by Actions, Though Better than UNDP

Byline: Matthew Russell Lee of Inner City Press at the UN: News Analysis

UNITED NATIONS, February 6 -- The World Bank is self-referential about its self-investigation. Most recent is a 64-page report, with multiple quotes from and photos of Paul Wolfowitz, discussing two years of inquiries by the Bank's Institutional Integrity Department, called INT. Notably, the head of INT is selected directly by, and reports only to, Wolfowitz. Unlike even the head of the UN Secretariat's Office of Internal Oversight Services, who is selected by the General Assembly as well as Secretary-General, the World Bank's investigative arm is entirely controlled by the agency's head. Structurally, then, any possible corruption at the highest levels would go undetected.

            The World Bank makes referrals, though, including in the UN to UNICEF and UNHCR, the agency for refugees. The report does not say what the referrals were about. While the World Bank's INT report names the names of sanctioned companies in an appendix, the circumstances of the infractions are not disclosed. Some can be found in the public record. For example, Thales Engineering and Consulting SA was disbarred for a year, since expired, reportedly for fraudulent practices in relation to the Cambodia Demobilization and Reintegration Project. Still, given that a high percentage of those disbarred are companies in Indonesia which most of the report's reader will never have heard of, sometimes merely "naming names" is not enough.

            The World Bank's INT is better, however, than the non-existent process at the UN Development Program. This is a comparison worth making, not only due to the two organization's overlapping mandates of top-down development, but also due to the railroad between the Bank and UNDP: Mark Malloch Brown, Kermal Dervis, and now the new Director of UNDPís Regional Bureau for Europe and the CIS, Kori Udovicki. Ms. Udovicki replaces the legendarily out-of-control Kalman Mizsei, and UNDP has told Inner City Press that "Dervis did not know her prior to her appointment... Please contact the World Bank for details on the supervisory relationships during any time Ms. Udovicki spent there." If as they claim it's "One UN," perhaps now some answers will be forthcoming.

Wolfowitz@UN

            As Inner City Press has twice reported, Kalman Mizsei was a traveling -- and Daily Sustenance Allowance receiving -- embodiment of sexual harassment. Perhaps understandably, UNDP nowhere publishes figures on sexual harassment, but rather requires reporters to ask and remind and wait weeks for a response. The World Bank's report, which will be published on the agency's website as a public document, brags that the two year period reported-on, it "terminated three staff members for sexual harassment; disciplined two for failure to comply with personal obligations; and disciplined four others for conflict of interest or other violations."

            UNDP, on the other hand, provided the following only in belated response to requests from Inner City Press:

"On sexual harassment: In 2005, there were 14 formal complaints of harassment, and 28 requests for information and/or support, from UNDP staff. In 2006, there were 22 formal complaints of harassment and 16 requests for information and/or support from UNDP staff. These figures encompass all forms of harassment, not only sexual harassment."

            Beyond noting that complaints at UNDP rose by over 50% from 2005 to 2006, it is difficult to compare the two agencies, given the different definitions. Both are part of the UN system, but each goes its own way; each implicitly brags that it is the best. But it is a competition in laxity. UNDP, for example, does not publish any listing of corruption in its programs.  As evidenced by the Democratic People's Republic of Korea - UNDP scandal which has led new Secretary-General Ban Ki-moon to call for urgent audits of all UN funds, programs and specialized agencies  -- not, apparently, including the World Bank or IMF --  UNDP does not even provide copies of its internal audits to the member states which fund its operations.

            The UN Secretariat's OIOS does provide copies of such audits, which reporters can then get, like the OIOS audit entitled "Investigation of conflict of interest, favoritism and mismanagement at the UN Joint Staff Pension Fund,", which Inner City Press yesterday reported on and quoted from, including that through the Pension Fund's Paul Dooley, millions of dollars in contacts were given to a company called Sprig, Ltd, run by Gerald Bodell, who was previously Dooley's supervisor at Guardian Mortgage Corporation.  According to the OIOS audit,

"OIOS found no evidence that UNJSPF [the UN Pension Fund] considered candidates other than Sprig for any of these contracts. Similarly, there is no  evidence that UNJSPF made any checks on the background of Sprig independently (for example by requesting a D&B report on Spring) or that UNJSPF attempted to independently determine whether Mr. Bodell's fees were consistent with those charged by other consultants."

                        The audit reports that Sprig was "operated by Mr. Bodell from the basement of his home," but nevertheless was given a higher score for "Web experience" than the accounting firm of Deloitte & Touche. Sprig's contract for "Strategic Information Technology and Management Consulting Study" was signed for the UN by Sanjaya Bahel, who was since by indicted and most recently had his bail revoked. A subsequent contract amendment for Sprig was signed for the UN by Andrew Toh, an Assistant Secretary General who is currently under investigation and for that reasons has not been asked to resign by new Secretary-General Ban Ki-moon. The audit concludes with the recommendation that "any contracting and procurement activities undertaken by the CEO of the UNJSPF comply with the Pension Board's directive that they be limited and only under exceptional circumstances."

            Flash-forward to June of 2006, a period of time regarding which two starkly different versions were presented at Monday's UN Pension Fund meeting. The Staff Council referred to documents which challenge Mr. Sach's presentation of himself as having opposed an earlier attempt to outsource Pension Fund business. After the meeting, Inner City Press asked Mr. Sach about these documents. Mr. Sach showed a copy of a memo from Chieko Okudo to then-Under Secretary General Christopher B. Burnham, on which was scrawled at the bottom of the first page an instruction to "do this by the book, -CBB." Such decisive (but not-followed) scrawling is consistent with the blustery approach of Paul Wolfowitz, and of this more-style-then-substance integrity report.

            Paul Wolfowitz, INT director Suzanne Rich Folsom and Chris Burnham are all Americans. But while the U.S. has insisted that the head of the UN Secretariat's OIOS not be controlled by the Secretary-General, it has apparently not even suggested that the head of INT should not be entirely controlled by the head of the World Bank. While clearly the U.S. is more comfortable with the one-dollar, one-vote structure of the World Bank, as opposed to the one-country, one-vote system of the UN General Assembly, one expects some structural consistency. Independence is good, no? And at the World Bank, who watches the watchers? 

            For example, despite the Wolfowitz-heavy report's near-religious inveighing against corruption, this fervor did not stop him from hiring Robin Cleveland, despite reports from the Wall Street Journal on email that "Air Force Secretary James Roche... sent at a critical point in 2003 as he sought to win over White House budget officials skeptical of the leasing costs. In the e-mail, Mr. Roche offered to help land a job for the brother of a senior official in the OMB who oversees defense acquisitions. ... In the e-mail that came to light last week, Mr. Roche discussed recommending the brother of OMB official Robin Cleveland for a job at defense contractor Northrop Grumman Corp., where the Air Force secretary had been an executive. Northrop says it received a referral about Peter Cleveland from Mr. Roche."

   Soon afterwards, according to Reuters, "White House officials... asked the Justice Department to probe any conflict of interest involving Air Force Secretary James Roche and Robin Cleveland, associate director at the Office of Management and Budget."

    Once Wolfowitz arrived at the World Bank, AFP reported that "Robin Cleveland, Wolfowitz's new counselor, was formerly associate director of the Office of Management and Budget in the White House. The World Bank's staff association, its de-facto trade union, says Wolfowitz's appointments risk opening the organization to charges of hypocrisy when it demands transparency of the poor countries that receive its aid. 'In order to be effective as an institution, we must exemplify the recommendations we make to others,' it said in a letter to Wolfowitz that was distributed to all staff members and obtained by AFP."  No glossy 64-page report can replace practicing what you preach.

At the UN, the Staff Pension Has a "Bad Odor" While Outsourcing is Still Pursued

Byline: Matthew Russell Lee of Inner City Press at the UN

UNITED NATIONS, February 5 -- Relations between UN staff and management, and distrust of corporations and the UN officials who land there, were both on display Monday at a meeting about the staff's pension. UN Controller Warren Sach took questions from the staff about a move to outsource to an investment firm the management of the over $9 billion of U.S. stocks on the pension portfolio. When the meeting was over, before taking questions for the press, Mr. Sach sighed that "there's a lot of disinformation around" and "such a bad odor from last year, it's going to take time to dissipate... The system is a bit too closed," he said, adding that "there are no published documents."

            But this largely remains the case. When asked at Monday's meeting how large a management fee would be paid, Mr. Sach did not have an answer. Mr. Sach was asked what he would do if Deutsche Bank, the firm where Christopher Burnham, the former Under Secretary General who pushed this outsourcing, now works bid for or got the management contract. This question was not answered during the open meeting, nor afterwards, despite the fact that in his final press conference at the UN, Mr. Burnham said he could not imagine working for a firm that would get business from the UN. Click here for video, and here for analysis.

            Following the meeting, Inner City Press asked Mr. Sach about this Burnham commitment. "I'm not sure he can bind Deutsche Bank," Mr. Sach replied. "He must be highly valuable, if they can forego business to have him."  Inner City Press asked for the list of bidders, or those on the short list who got the Request for Proposals, as well as for a copy of the RFP.  For the RFP, Inner City Press was referred to the administrative officer of the UN Investment Management Service, Chieko Okudo, from where another referral was made. Hours later, the RFP had still not been produced, and Inner City Press was told that neither would the list of bidders be released. Similar difficulties in obtaining answers and documents arose last year during Inner City Press' reporting on the conflicts raised by UN investment fees being paid to Pictet & Cie., whose Ivan Pictet serves as an "ad hoc" member of the UN Pension Fund's Investment Committee, on which now sits a Vice Chairman of Merrill Lynch and former directors of Morgan Stanley and Commerzbank.

            That there are causes of concern can be found in an until-now confidential report of investigation by the UN's Office of Internal Oversight Services. In OIOS' "Investigation of conflict of interest, favoritism and mismanagement at the UN Joint Staff Pension Fund," the complaints of two whistleblowers were considered and upheld.

UN's Sach

Specifically, OIOS confirmed that through the Pension Fund's Paul Dooley, millions of dollars in contacts were given to a company called Sprig, Ltd, run by Gerald Bodell, who was previously Dooley's supervisor at Guardian Mortgage Corporation.  According to the audit:

"OIOS found no evidence that UNJSPF [the UN Pension Fund] considered candidates other than Sprig for any of these contracts. Similarly, there is no  evidence that UNJSPF made any checks on the background of Sprig independently (for example by requesting a D&B report on Spring) or that UNJSPF attempted to independently determine whether Mr. Bodell's fees were consistent with those charged by other consultants."

            The audit reports that Sprig was "operated by Mr. Bodell from the basement of his home," but nevertheless was given a higher score for "Web experience" than the accounting firm of Deloitte & Touche. Sprig's contract for "Strategic Information Technology and Management Consulting Study" was signed for the UN by Sanjaya Bahel, who was since by indicted and most recently had his bail revoked. A subsequent contract amendment for Sprig was signed for the UN by Andrew Toh, an Assistant Secretary General who is currently under investigation and for that reasons has not been asked to resign by new Secretary-General Ban Ki-moon. The audit concludes with the recommendation that "any contracting and procurement activities undertaken by the CEO of the UNJSPF comply with the Pension Board's directive that they be limited and only under exceptional circumstances."

            Flash-forward to June of 2006, a period of time regarding which two starkly different versions were presented at Monday's meeting. The Staff Council referred to documents which challenge Mr. Sach's presentation of himself as having opposed an earlier attempt to outsource Pension Fund business. After the meeting, Inner City Press asked Mr. Sach about these documents. Mr. Sach showed a copy of a memo from Chieko Okudo to then-Under Secretary General Christopher B. Burnham, on which was scrawled at the bottom of the first page an instruction to "do this by the book, -CBB." Mr. Sach said that some had circulated copies of this memo with the bottom notation removed.

            Inner City Press has obtained copies of emails from the time at issue, which tell a different story. After a decision was made to "liquidate" a small capitalization fund managed for the Pension Fund by Lombard, Odier, Darier and Hentsch (LODH), an internal debate ensued whether the liquidation contact could be given without bidding to the Northern Trust bank, which was already the global Custodian of the Fund. Despite the questions raised, by July 5 Northern Trust's Vice President Robert Ernst wrote to two individuals at the UN that the liquidation was finished, "would you like sales proceeds to remain in the LODH portfolio, or transferred out to your own cash accounts?"

            Before this liquidation, taking the position that this would require a formal bid-out procurement process in a June 13, 2006 email was Yavar Khan, who wrote to Ms. Okuda that:

"Chieko: I do have a problem with your memo. The memo needs to state the complete additional services to be performed other than NT [Northern Trust] act as the Master Record Keeper. Recently, a number of changes and additional services outside the original scope have been requested to be undertaken by Northern Trust. All this has been undertaken in a non-competitive environment.... The organization is now open for criticism if we continue to expand the scope of NT, which was not originally envisaged. This can lead to other banks suggesting that we have not been open and transparent..."

            But it is now not only "other banks" who are complaining about a lack of transparency. The majority of questions directed to Mr. Sach on Monday were critical in nature, asking "why fix it if it isn't broken" and why hand money to an outside firm.

   Later the question was asked, can we see the Request for Proposals, and know what firms are on the short list? No such information has been provided. Mr. Sach was asked if by outsourcing, the UN wouldn't lose control, including over the social impact of its investments. Mr. Sach answered than even an outsourced, indexed fund could be screened. He gave the example of eschewing investment in tobacco -- ironic, given his admittedly heavy-hearted admission of having approved the UN spending $130,000 to on a ventilation system for smoking in the UN's Vienna Cafe. And the "bad odor from last year" to which Mr. Sach referred will take still longer to dissipate. The rising question is what Ban Ki-moon will do. Developing.

Other Inner City Press reports are available in the ProQuest service and some are archived on www.InnerCityPress.com --

            Copyright 2006 Inner City Press, Inc. To request reprint or other permission, e-contact Editorial [at] innercitypress.com - phone: (718) 716-3540