ProPublica
Investigative Journalism in the Public Interest

by Jake Bernstein and Jesse Eisinger

Last week, in partnership with NPR's "Planet Money," we published an investigation about how Wall Street banks created fake demand in the run-up to the housing meltdown, increasing their bonuses -- and ultimately making the crisis worse. We asked for your questions, and now here are our reporters' answers.

Q. As a bank, aside from the short-term gain of bonuses, why would you invest in your own CDOs? If your aim is to get rid of the liabilities and manage risk, why would you buy CDOs based on your CDO? Wouldn't you want to get rid of your liability altogether?

A. It was a catastrophic error. There were several reasons why they would do it. They wanted to complete deals, to keep their mortgage securities assembly lines going. So if they had to take a bit of the CDOs to keep their deals flowing and the year-end bonuses coming, they would. (Or, more precisely, they would "sell" it to another part of the bank.)

In some cases, they were doing the proverbial "picking up nickels in front of the steamroller" trade. They would retain the top part of the CDO and hedge it, sometimes with a fragile insurer. They would make a little bit of money because the CDO threw off more money than it cost to hedge. But when the CDOs failed, the insurers (like MBIA and Ambac) collapsed and the banks were stuck with the virtually worthless CDOs.

Q. What balance sheet benefit resulted when one bank's CDO bought another CDO's lower-valued tranches?

A. If one bank bought a piece of another bank's CDO, then that was truly off the first bank's books.

However, in the late stages of the CDO boom, CDOs were essentially swapping pieces with each other in apparent quid-pro-quos.

Here's a hypothetical: Merrill sponsors "CDO Jesse" and Citigroup sponsors "CDO Jake." Jesse buys a mezzanine (or middle) slice of Jake and Jake buys a piece of Jesse.

Since each CDO owns something that owns itself, it has a less diversified set of assets. Those two CDOs are inherently weaker than they would have been.

If Merrill had retained the top portion -- or super-senior -- of Jesse, and Citi had done the same with Jake, then both banks were more exposed to the risk of losses than they would have been if they had sold the pieces of the CDOs outright to outside investors.

Q. The crux of the article is that banks with unsold CDOs on their books put them into pools of bonds to back new CDOs. I just don't see what is nefarious about that, since the composition of the pool is disclosed to the CDO buyers, who are all professional investors, who can look out for themselves. And it's only natural that banks would try to get risky assets off their books. Isn't that what we want them to do? Wasn't the problem that some banks had too many risky assets on their books, not too few?

A. The problem was, as our piece points out, that the assets weren't really off the books. They only looked that way. When a bank pushed unsold assets into a new CDO, but retained the top 80 percent or so (called the super-senior), it was still exposed to the majority of the new CDO.

Since the new CDO was filled with lousy assets, it was more fragile. So the banks were on the hook for losses that they wouldn't have been if they had really sold the assets or made the deals more solid.

Further, to the idea of what investors knew or could have known: One surprise for us was that investors didn't necessarily know all the assets that the manager selected when they invested. Deals often closed without being fully completed. Investors would know that the remaining 10 or 20 percent would be filled with CDO pieces, but they wouldn't know which ones.

But to the larger point, you are right. Much of this was disclosed in the prospectuses, although buried in hundreds of pages of legalese and nonspecific caveats.

The parties in the transactions that might be in the most legal jeopardy are the CDO managers. They had a fiduciary responsibility to manage the CDO properly and that their role was accurately represented to the investor.

Q. So who's paying those fees? I sell you something and earn a fee and then you sell me something and earn a fee. Where's the net income?

A. The income generated by the CDO itself provides the fees for the manager and the bank. In that respect, it's a bit like mutual funds, where the fees get taken out of your returns. Normally, there was some actual, or as they say on Wall Street, real money, in the deal. This would be used to pay the fees.

Q. Weren't these CDOs rated by "independent" ratings agencies?

A. I think you already know the answer to this question! Like the managers, the rating agencies depended on the banks for their income. As one rating agency official told us, agencies couldn't say no to a deal and the banks knew it.

In devising their ratings on managers, the rating agencies chose to look at the wrong things. As one executive at a CDO manager told us, the agencies "did heavy, heavy due diligence on managers but they were looking for the wrong things: how you processed a ticket or how your surveillance systems worked," adding, "They didn't check whether you were buying good bonds."

Q. Why wasn't this self-dealing fraud?

A. In some cases, it may have been. That's up to the SEC -- which is aggressively investigating the CDO business and, especially, banks' relationships to managers -- and ultimately to the courts.

However, some of the questionable behavior may have been perfectly legal. For instance, banks had agreements to own the assets that CDO managers selected before those assets were placed into the CDO. That gave the banks the right to veto managers' selections. As our story showed, in late 2006, banks began to routinely use this veto. Was this perfectly appropriate behavior? It may have been, at least on the banks' side.

The managers, however, have fiduciary duties. They cannot misrepresent that they were selecting assets if indeed they weren't. And they cannot do things that aren't good for the CDO. That could be illegal.

But these cases are challenging. The subject matter is complicated. The investigations are resource-intensive and time-consuming. And the legal disclosures on the deals themselves were extensive.

by Marian Wang

5:45 pm: This post has been updated.

The Coast Guard reported today that a mile-long oil sheen is spreading in the Gulf after an offshore oil rig exploded and caught fire earlier today, about 200 miles west of BP’s ruptured Deepwater Horizon well.

The rig is owned by a company called Mariner Energy, which has been involved in at least 13 accidents in the Gulf of Mexico since 2006, “including a blowout and four fires,” reported the Houston Chronicle.

No one was killed in this latest incident and the 13 workers aboard the rig were rescued. The platform, however, is still ablaze, and Mariner Energy’s early report of no leak has been cast into doubt. (The company also said in its press release that no injuries have been reported, although one person was reported injured.)

"Mariner has notified and is working with regulatory authorities in response to this incident. The cause is not known, and an investigation will be undertaken," the company said in a statement.

In April, Apache Corp., another petroleum company, announced it was acquiring Mariner, but according to the Associated Press, that deal is pending. More from the AP:

Apache spokesman Bob Dye said the platform is in shallow water. Responding to any oil spill in shallow water would be much easier than in deep water, where crews depend on remote-operated vehicles access equipment on the sea floor.

ThinkProgress points out that both Mariner Energy and Apache Corp. were at a rally just yesterday to protest the Obama administration’s temporary moratorium on offshore drilling. ThinkProgress pulled the following from the Financial Times:

Companies ranging from Chevron to Apache bussed in up to 5,000 employees to the Houston convention centre to underline to Washington the industry’s contribution to the country. ...

“I have been in the oil and gas industry for 40 years, and this administration is trying to break us,” said Barbara Dianne Hagood, senior landman for Mariner Energy, a small company. “The moratorium they imposed is going to be a financial disaster for the gulf coast, gulf coast employees and gulf coast residents.”

Mariner is one of the smaller players in the Gulf: The rig that exploded produced, on average, about 1,400 barrels of oil a day during the last week of August, the company said. By comparison, some of BP's smaller wells produce more than 60,000 barrels a day.

While not nearly on the scale of the BP’s Deepwater Horizon disaster, the latest accident still probably doesn’t help bolster the industry’s argument that the risks of offshore drilling are overblown.

Update: The Coast Guard has backed off its earlier report of an oil sheen, and is now reporting that there are no signs of a spill.

by Marian Wang

Sept 2: This post has been updated.

Despite allegations that Moody’s Investors Service, one of the three major credit rating agencies, committed fraud when it failed to fix what it knew was an erroneous rating, the Securities and Exchange Commission announced on Tuesday that it wouldn’t sue the rating agency. It instead settled for a scolding, directed at ratings agencies generally.

Historically, rating agencies have argued with some success that the First Amendment protects their ratings, but much of the examination done after the financial meltdown has cast blame on the agencies for caving into pressure from investment banks and compromising standards in order to preserve market share. It has also brought a string of lawsuits from investors and issuers alike.

States and local governments have recently noticed, however, that Moody’s is including in its contracts what’s known as an “indemnification clause,” which helps protect the agency from lawsuits, according to Bloomberg.

The clauses, Bloomberg explained, push liability onto the issuers; in the municipal bond market, lawsuits that hold the issuer responsible for bad ratings could ultimately cost taxpayers.

Moody’s acknowledged the clauses, but said they’re not new.

“These types of indemnification clauses are common in business services agreements,” said Moody’s spokesman Michael Adler told Bloomberg.

And it seems Moody’s hasn’t been alone in seeking some measure of legal protection:

“Fitch has long included indemnification language in some of its general business agreements,” said Daniel Noonan, spokesman for the company in New York. “However, Fitch has not included indemnification language in its issuer agreements.”

S&P has entered into “revised agreements with many issuers over the last several months,” said spokesman Edward Sweeney in New York.

(S&P spokesman Ed Sweeney gave the following statement: ""For the capital markets to function properly, investors should receive from issuers information relevant to the performance of a security. Likewise, S&P's expects issuers to stand behind the accuracy and completeness of the information they provide as part of the rating process.")

As the Center for Public Integrity reported in June, ratings agencies fought hard against language in the Dodd-Frank financial reform bill that would expose them to more liability. From the official summary of the bill (PDF):

Liability: Investors can bring private rights of action against ratings agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source.

While this sounds straightforward enough, the effects of the final language are still unclear. The bill essentially requires issuers to get permission from the ratings agencies in order to include their ratings in offering documents for bond sales. If a rating agency agrees, it exposes the agency to liability if the ratings are wrong. Here’s Fitch reacting:

Fitch is not willing to take on such liability without a complete understanding of the ramifications of that liability to Fitch’s business and the means by which Fitch may be able to effectively mitigate the risks associated therewith.

The solution? Moody’s, Fitch, and S&P have all asked for their ratings not to be used in official documentation. (Ratings agencies would argue that ratings are essentially their best predictions of the future, and they shouldn't be held liable if those predictions don't pan out.) There’s a separate SEC rule, however, that requires ratings to be included in the offering documents for asset-backed securities in particular, but that rule has been temporarily suspended until Jan. 24, 2011.

After the rule suspension expires, rating agencies will likely be exposed to more liability for ratings of those securities, but it remains unclear whether that will be true for other bonds. One thing’s for sure — agencies are doing what they can to “mitigate the risks” and minimize the degree to which they can be held responsible for their own mistakes.

Update: Moody's announced it will discontinue the use of indemnification language in its contracts with muni-issuers. This post has also been updated with comment from S&P.

by Abrahm Lustgarten

The federal government is warning residents in a small Wyoming town with extensive natural gas development not to drink their water, and to use fans and ventilation when showering or washing clothes in order to avoid the risk of an explosion.

The announcement accompanied results from a second round of testing and analysis in the town of Pavillion by Superfund investigators for the Environmental Protection Agency. Researchers found benzene, metals, naphthalene, phenols and methane in wells and in groundwater. They also confirmed the presence of other compounds that they had tentatively identified last summer and that may be linked to drilling activities.

"Last week it became clear to us that the information that we had gathered" "was going to potentially result in a hazard -- result in a recommendation to some of you that you not continue to drink your water," Martin Hestmark, deputy assistant regional administrator for ecosystems protection and remediation with the EPA in Denver, told a crowd of about 100 gathered at a community center in Pavillion Tuesday night. "We understand the gravity of that."

Representatives of the EPA and the Agency for Toxic Substances and Disease Registry, which made the health recommendation, said they had not determined the cause of the contamination and said it was too early to tell whether gas drilling was to blame. In addition to contaminants related to oil and gas, the agency detected pesticides in some wells, and significant levels of nitrates in one sample -- signs that agricultural pollution could be partly to blame. The EPA's final report on Pavillion's water is expected early next year.

ProPublica first drew attention to Pavillion's water in late 2008, and reported extensively on the EPA's ongoing investigation there last August.

EnCana, the oil and gas company that owns most of the wells near Pavillion, has agreed to contribute to the cost of supplying residents with drinking water, even though the company has not accepted responsibility for the contamination.

EnCana spokesman Doug Hock told ProPublica in an e-mail that the petroleum hydrocarbon compounds the EPA found "covers an extremely wide spectrum of chemicals, many of which aren't associated with oil and gas."

"ATSDR's suggestion to landowners was based upon high levels of inorganics -- sodium and sulfate that are naturally occurring in the area," he said.

EPA scientists began investigating Pavillion's water in 2008 after residents complained about foul smells, illness and discolored water, and after state agencies declined to investigate. Last August the EPA found contaminants in a quarter of samples taken during the first stage of its investigation, and the agency announced it would continue with another round of samples -- the set being disclosed now.

In the meeting Tuesday, the agency shared results from tests of 23 wells, 19 of which supply drinking water to residents. It found low levels of hydrocarbon compounds -- various substances that make up oil -- in 89 percent of the drinking water wells it tested. Methane gas was detected in seven of the wells and was determined to have come from the gas reservoir being tapped for energy. Eleven of the wells contained low levels of the compound 2-butoxyethanol phosphate -- a compound associated with drilling processes but that is also used as a fire retardant and a plasticizer.

The scientists also found extremely high levels of benzene, a carcinogen, and other compounds in groundwater samples taken near old drilling disposal pits. Some of the samples were taken less than 200 yards from drinking water sources and scientists expressed concerns that the contaminated water was connected to drinking water wells by an underground aquifer.

"The groundwater associated with some inactive oil and gas production pits" "is in fact highly contaminated," Ayn Schmit, a scientist with the EPA's ecosystems protection program, told residents. But she also cautioned that the EPA has not determined the cause of the contamination and is continuing its investigation.

by Marian Wang

Three House lawmakers -- two Republicans and one Democrat -- may soon be under investigation by the House ethics committee for potential links between their political fundraisers and subsequent votes on the financial reform bill.

The Office of Congressional Ethics -- an independent body -- has referred cases involving John Campbell, R-Calif., Tom Price, R-Ga., and Joseph Crowley, D-N.Y., to the ethics committee, but did not recommend further investigation of five other lawmakers it had previously included in its probe.

All three lawmakers held fundraisers in December, "around the time of crucial House votes," reported The Associated Press. (In statements, Campbell and Price both expressed surprise at the referral and said there was no evidence suggesting wrongdoing. Crowley's office issued a statement asserting that he "has always complied with the letter and spirit of all rules regarding fundraising and standards of conduct.")

The House ethics committee will decide whether to investigate further. It already is handling two high-profile ethics cases -- Rep. Charlie Rangel, D-N.Y., and Rep. Maxine Waters, D-Calif., await public hearings -- as well as investigating whether a half-dozen lawmakers misused overseas travel stipends, according to a less-noticed piece in The Wall Street Journal on Tuesday.

The Journal reported that Reps. Joe Wilson, R-S.C., Alcee Hastings, D-Fla., G.K. Butterfield, D-N.C., Robert Aderholt, R-Ala., and Solomon Ortiz, D-Texas, as well as former Rep. Mark Souder, R-Ind., had been contacted by ethics investigators regarding use of travel stipends. (Souder was dropped from the investigation after he retired.)

The lawmakers had either bought souvenirs, paid for drinks and gifts for others, or kept money left over from their travels. The Journal pointed out that there's "no system for lawmakers to return excess travel funds when they return to the U.S.," so investigators may end up simply concluding that the protocol was unclear.

It's clearer now. The rules changed in May, when House Speaker Nancy Pelosi stated that lawmakers on official business would have to fly coach unless the trip was more than 14 hours, wouldn't be able to use their travel stipends on gifts or souvenirs, and would be required to return all excess money to the Treasury.

by Karen Weise

The Acevedo family, of Staten Island, N.Y., has been in a trial loan modification for about a year. (Photo by Karen Weise/ProPublica)

It all started after the father, Michael, an exterminator, second from left, was laid off, and their house went into foreclosure. (Photo by Karen Weise /ProPublica)

Now, as they hope for a permanent loan modification, they continue to have monthly court appearances. (Photo by Karen Weise/ProPublica)

Jonathan, 9, left with his mother Concetta, doesn't want to leave his home and friends if his family loses their house. (Photo by Karen Weise/ProPublica)

Of the loan mod process, Michael says, 'I wonder if they have a little cube, and they throw it up in the air to see what decision they're going to make.' (Photo by Karen Weise/ProPublica)

Slideshow: prev next

Download the audio.

Listen to Michael and Concetta talk about the loan mod process.

Last fall, Wells Fargo told Michael and Concetta Acevedo that after a three-month trial, they could get a permanent mortgage modification that would allow them to keep their Staten Island townhouse.

Instead, 10 months later, the Acevedos are still making trial payments and fighting to save their home. The delays have dragged on even though a judge penalized Wells Fargo for errors processing their case. The Acevedos' trust in the bank -- and the modification process -- has run dry.

"I wonder if they have a little cube, and they throw it up in the air to see what decision they are going to make," said Michael Acevedo.

More than 1.3 million homeowners like the Acevedos have started trial modifications under the government's foreclosure relief program. Qualified homeowners are supposed to make trial payments for three months, but the vast majority of trials have lasted far longer, delaying both approvals and denials.

Despite pledges by banks and other mortgage servicers to reduce backlogs, 118,000 households have been in trials for at least six months. Although Treasury Department officials have said extended trials benefit people by providing temporary relief, homeowners and their advocates say long trials can hurt borrowers by increasing the amount they owe, lowering their credit scores and leaving them with less money saved in case they lose their homes.

The Acevedos say they've done everything they can to make their house payments, even wiping out their savings. Michael lost his longtime job as an exterminator in early 2009. He eventually found work, but makes less money. Concetta continues to work as a home health care aide. Their 19-year-old son works at a 7-Eleven while going to college full time.

Since April, a Richmond County court judge has presided over monthly state-mandated foreclosure settlement conferences between the Acevedos and Wells Fargo. The judge has penalized Wells Fargo for improperly denying them a final modification and not providing the written reasons for the denial as previously ordered by the court, according to Joseph Sant, their attorney from Staten Island Legal Services.

Sant said a Wells Fargo representative recently made a verbal offer to reduce the Acevedos' monthly mortgage payments by half, but they have received no written confirmation and the family remains skeptical.

"I ain't gonna believe it until I have it in my hand," Michael Acevedo said.

Wells Fargo spokesman Jason Menke said he could not comment on the Acevedos' situation because their court case is ongoing.

Prolonged trial periods can compound homeowners' problems because, as they make trial payments, the difference between the reduced and full payments builds up, creating large debts if they don't get permanent relief.

Seattle homeowner Carolyn Chaney has been making trial payments since November. Though she was current on her mortgage before asking for a modification, she now has $8,000 of accrued debt.

"We didn't know what we were getting into," says Chaney, a janitor at a university campus. "If you weren't going to help us, you didn't have to hurt us."

Bank of America spokesman Rick Simon says the bank has contacted Chaney to let her know she's been approved for a modification, and the final paperwork "should be sent in the coming days."

Typically banks add the accrued debt to the principal if the homeowner gets a modification, or demand a lump-sum payment if the modification is denied. (The Treasury Department recently said it was "concerned" (PDF) about the lump-sum payments and is considering creating a new policy to address the issue.)

One Connecticut homeowner, who asked not to be named, said she was so worried about accruing debt, she asked to make full monthly payments during the trial period. The bank said she could only make the reduced trial payment. Since October, she's accrued $425 in debt per month.

Many homeowners report that their credit scores have taken a hit, too. Servicers can use a temporary negative code (PDF) to report homeowners to credit bureaus during the three-month trial. If the trial extends beyond three months, however, servicers are required to switch to a neutral code (PDF) created last November specifically for government modifications. If servicers incorrectly continue to report homeowners in prolonged trials under the negative code, their credit scores could remain depressed by 50 points or more, said Ethan Dornhelm, an expert at FICO, which developed one of the credit-scoring systems.

Several homeowners have told ProPublica that even after being approved for permanent mortgage modifications, they haven't received their final paperwork.

Michigan homeowner Chiquita Carter received a letter from Bank of America in March saying she was approved for a permanent modification after a seven-month trial. But now, five months later, she still has not received the final paperwork and continues to make monthly trial payments. Meanwhile, she says, Bank of America sent her a notice that it planned to sell her home in a foreclosure sale.

Mortgage servicers are required to halt the foreclosure process for homeowners who are being considered for a government modification, are in an active trial period, or have been approved for a permanent modification, according to program guidelines (PDF).

After being contacted by ProPublica, the bank reviewed Carter's case and determined that someone at the bank had flagged her file with an internal computer code, erroneously halting Carter's modification process. Simon, the bank's spokesman, said the foreclosure sale will be canceled and Carter should soon be able to finalize her modification.

ProPublica's Paul Kiel and Olga Pierce contributed to this story.

Have you been in a trial modification for more than three months? Please use the comments section below to discuss with other homeowners.

by Marian Wang

Sept. 1: This post has been updated.

In a post last week, we noted that David Koch, an American businessman and philanthropist, has given millions to cancer research while his company, Koch Industries, lobbied against formal recognition of formaldehyde as a carcinogen.

In a post today, Think Progress’ Wonk Room pointed out another seeming contradiction:

Today, the Department of Health and Human Services announced the “first round of applicants accepted into the Early Retiree Reinsurance Program,” a $5 billion program established by the new health care law to help employers and states “maintain coverage for early retirees age 55 and older who are not yet eligible for Medicare.” According to the agency, “nearly 2,000 employers, representing large and small businesses, State and local governments, educational institutions, non-profits, and unions” applied and have been accepted into the program and “will begin to receive reimbursements for employee claims this fall.”

Ironically, one of those employers is the oil, chemicals, and manufacturing conglomerate Koch Industries.

Koch Industries, on its website, took a public position opposing health care reform:

Koch Industries' point of view regarding health care has nothing to do with political parties and everything to do with our fundamental principles. As a matter of principle, should government mandate prices and control access to doctors and hospitals? Is government an efficient health-care administrator? What's more, is it morally right to run up billions of dollars in unfunded liabilities by promising entitlements for everyone? The principled, market-based answer is no.

So did David Koch, a co-owner of the company. In an editorial posted on the company website, he warned that the U.S. health care system was “under fierce attack,” and cautioned against “a government takeover of health care,” “further socialization of our health care system,” and “an over-reaching government that insists on encroaching into every aspect of our personal lives – especially health care.” (We've invited Koch Industries to comment and will update if the company has a response.)

Criticism of the health care law, however, does not seem to have prevented Koch Industries from applying for funds under the law--but that’s nothing new.

As The Associated Press reported today, more than a half-dozen states that are suing the federal government to overturn the health care law are also claiming its subsidies for covering retired state government employees.

Update: Koch Industries came back to us with a response. Here it is, in full:

History shows that when people get to decide to spend their resources on products and services they value, you get innovation, efficiency, and the greatest quality-of-life improvements in a society. That's why we consistently favor market-based policy solutions and oppose mandates and subsidies.

However, once laws or programs are enacted we will not place ourselves or our employees at a disadvantage by turning our back on incentives offered to our competitors.

by Mike Webb

Last week, the ongoing, joint investigation by ProPublica, Frontline and the New Orleans Times-Picayune revealed that after Hurricane Katrina an order circulated among New Orleans police authorizing officers to shoot looters. The following day, we reported that federal agents had begun an inquiry into the allegations. To date, sixteen current and former New Orleans police officers have been charged with crimes related to post-Katrina shootings. And there are nine separate civil rights investigations of the department underway.

In this week’s ProPublica Podcast, Quadia Muhammad speaks to reporter A.C. Thompson about the post-Katrina shootings and new allegations. The pair discuss the NOPD’s culture of corruption, what took place in the days after Katrina hit, what caused the “shoot looters” orders confusion, why past proposed reforms to the NOPD never took hold and ultimately, how the federal government could take over the department.

Stories related to this podcast:

Federal Agents Open Inquiry Into Order Authorizing NOPD Cops to Shoot Looters

After Katrina, New Orleans Cops Were Told They Could Shoot Looters

Feds Tell Two New Orleans Officers They’re Targets in Post-Katrina Shooting Probe

ProPublica Law & Disorder homepage

Frontline: Law & Disorder (watch the investigation online)

New Orleans Times-Picayune Law & Disorder series page

by Sasha Chavkin

6:27 p.m.: This post has been updated.

Just over a week ago, when Kenneth Feinberg took over the process for handling damage claims from the Gulf oil spill, he promised to cut through the delays and confusion that applicants faced under the much-maligned BP system.

But signs are emerging that Feinberg’s goals – particularly his pledge to respond to personal claims for emergency payments within 48 hours – may be overly ambitious. Applicants participating in our BP Claims Project say that they have not received responses within two days of filing claims and that they have encountered an array of service problems, from a system crash to difficulty in transferring critical paperwork.

Amy Weiss, Feinberg’s spokeswoman, acknowledged on Sunday that the facility was experiencing delays. “In the first few weeks...we may be short of our 48-hour goal,” Weiss said in an e-mail.

Weiss said many of the claims could not be processed because they lacked sufficient documentation, and that the new Gulf Coast Claims Facility has approved about $6 million in payments to just under 1,200 individuals. Statistics from the GCCF indicate that only about 6 percent of total claims – for both individuals and businesses – had been paid as of Monday.

Feinberg’s guarantee of a two-day response time was central to his plan to improve the BP claims process. Speed is crucial to applicants struggling to pay their bills. Some have already waited months while BP deferred claim decisions.

But applicants told us they’ve gotten conflicting information about when the response period officially starts and, thus, how quickly they can expect to get paid.

Feinberg’s protocol for emergency payments says applications “will be evaluated preliminarily within 24 hours of receipt of the completed form and supporting documentation.” If the claim is approved, the protocol says, a payment is supposed to be authorized within another 24 hours.

But a page on the GCCF’s website gives different information: Its “Frequently Asked Questions” feature doesn’t specify how long the preliminary evaluation will take, and says payments will then be authorized within 48 hours.

Weiss said each source is partially right. She confirmed that the GCCF is supposed to complete its preliminary review within a day, but said it would take up to two days after that for payments to be issued.

Several applicants participating in our BP claims project said three days or more had passed without any response. (If you’ve filed a claim with the GCCF and are still waiting, you can tell us about your experience using this quick online form.)

Donna Davis, who filed a claim for lost income after being laid off from her job at a vacation condo rental company in Orange Beach, Ala., said a claims agent told her last Friday that claims would be paid within 48 hours after being reviewed, not 48 hours after being submitted. The review period could take up to three weeks, Davis said she was told.

Russell Porter filed his claim for property damage to his condo in Gulf Shores, Ala., on the morning of Aug. 23. When he contacted the GCCF two days later, a claims representative told him “since they have such a deluge of people, they’re asking people to wait 48 to 72 hours,” Porter said.

He called again the following day. This time, he said, a GCCF representative said “they have no idea how long it will take to process any claim.” Porter said he has spoken to eight different agents since refiling his claim.

Turning around claims in 48 hours is a “hellaciously aggressive” target for an operation as large as Feinberg’s, said Mike Dekema, a claims management consultant with 30 years of experience in the industry. “The guy should win the Nobel Prize if he can do this in the timeline that he has outlined,” he said.

He added that the first 30 days will be critical in shaping public perception of the new claims unit.

“The biggest concern I have is whether he is unreasonably setting expectations when people are already predisposed to have a negative opinion of the process,” Dekema said.

Some claimants told us their main source of frustration has been logistical hassles, rather than timing.

Marco Jackson, who said he had to shut down his seafood stand in Destin, Fla., after the spill, gave supporting documents to BP when he filed a business claim in June.

When GCCF took over, he resubmitted the claim, on Aug. 23, but was told he wouldn’t need to refile the documents. Then he was told he would. He tried to do it electronically, only to find the online system was down.

He followed up by phone, but discovered that GCCF had the wrong address for his claim. The claim remains in limbo.

“It’s getting to be a high level of frustration, because they’re supposed to be more competent than BP, and it’s looking like they’re less competent,” Jackson said.

Weiss said all documents submitted to BP should have been transferred to the new operation by now. She stressed that GCCF was working hard to speed up payments.

“We are literally working 24 hours a day to issue eligible payments as soon as possible,” she said.

Update: Amy Weiss, Feinberg’s spokeswoman, has provided more current figures for the number and value of claims processed by GCCF. She said the GCCF has now paid out close to $10 million since opening on Aug. 23. She said that the facility has received and is reviewing more than 31,000 claims

by Marian Wang

As we pointed out last week, the Food and Drug Administration -- the agency responsible for ensuring the safety of 80 percent of the nation's food supply -- rarely inspects farms, and does so "almost exclusively in periods of crisis," according to one report.

The latest crisis -- a salmonella outbreak that caused more than a half-billion eggs to be recalled -- has prompted the FDA to begin inspecting all of the country's largest egg farms before the end of next year, according to The Associated Press. The two Iowa egg companies at the center of the recalls got inspections first. The agency has now posted those inspection reports.

One of the reports, for Wright County Egg [PDF], found "excessive amounts of manure" blocking the entrances to some henhouses -- "approximately 4 feet high to 8 feet high" in several areas. The report documented live mice in the egg-laying houses, and "live and dead flies" and "live and dead maggots too numerous to count."

Another report, for Hillandale Farms [PDF], noted unsealed rodent holes and manure problems. It also reported that the water used to wash eggs tested positive for salmonella.

Wright County Egg told The Wall Street Journal that the company has "worked around the clock" to address the FDA's concerns; Hillandale farms said it was "in the process of responding to the FDA's written report to provide further explanation and clarification of what was observed."

Both companies are linked to Jack DeCoster, whose businesses in several states have had a history of environmental, labor, immigration and animal abuse problems, according to The Des Moines Register.

The Centers for Disease Control and Prevention has estimated that more than 1,400 people were sickened in this outbreak.

by Marian Wang

As we describe in our CDO investigation published last week with our partners at Planet Money, the inner workings of Wall Street’s world of structured finance are complicated.

While we hope to have shed light on the subject, we’re under no illusion that our 5,000-word investigation (and its accompanying charts, song, comic, and crib sheet) has answered all your questions about a rather dim corner of the financial world.

If you’ve got questions, send them to us. And just as we did with our Magnetar investigation, we’ll take the most frequently asked questions and supply the answers as best we can.

by Marian Wang

The military prosecution of a Guantanamo prisoner — alleged to be a senior al-Qaida operative, a close associate of Osama bin Laden and the mastermind of the deadly attack on the USS Cole in Yemen — has come to a halt, reported The Washington Post.

The prisoner, Abd al-Rahim al-Nashiri, was waterboarded while in CIA custody. He allegedly confessed to orchestrating the suicide attack on the Cole attack — which killed 17 sailors and wounded many more in October 2000 – but the CIA destroyed the videotapes of his interrogation. Charges against him were withdrawn in February 2009 and later dismissed because of the Obama administration’s concerns about the legitimacy of the military commissions set up by the Bush administration. His trial was supposed to be—as the Post describes it—“the signature trial of a major al-Qaeda figure under a reformed system of military commissions.”

But in a court filing last week, the Justice Department acknowledged that "no charges are either pending or contemplated with respect to al-Nashiri in the near future," the Post noted.

As we’ve reported, the government has more often than not lost in fighting Guantanamo prisoners’ habeas lawsuits – 8 of 15 cases &ndash when inmates alleged that either their confessions or witnesses’ testimony had been obtained through coercive techniques. From a recent New York Times editorial based on our story:

A new report prepared jointly by ProPublica and the National Law Journal showed that the government has lost more than half the cases where Guantánamo prisoners have challenged their detention because they were forcibly interrogated. In some cases the physical coercion was applied by foreign agents working at the behest of the United States; in other cases it was by United States agents.

Even in cases where the government later went back and tried to obtain confessions using “clean,” non-coercive methods, judges are saying those confessions too are tainted by the earlier forcible methods. In most cases, the prisoners have not actually walked free because the government is appealing the decisions. But the trend suggests that the government will continue to have a hard time proving its case even against those prisoners who should be detained.

Despite the Justice Department’s statements, the Defense Department told the Post that the case was still moving forward.

“Prosecutors in the Office of Military Commissions are actively investigating the case against Mr. al-Nashiri and are developing charges against him,” a statement from the Defense Department read.

by Mike Webb

As drilling for natural gas continues in states across America, PBS’s “Need to Know” bores down into the issue by taking a closer look at the safety concerns that surround the drilling process known as hydraulic fracturing. In a report produced in collaboration with ProPublica reporter Abrahm Lustgarten, the program investigates how fracking threatens to contaminate drinking water sources for millions of Americans.

And for those of you who complain that we don’t feature enough celebrities in our work, “Need to Know” talks to actor Mark Ruffalo about why he opposes fracking. “Need to Know” airs over the weekend on PBS stations across the country. Click here to find your local station and show time.

If you would like more information on stories related to this episode, be sure to read:

EPA: Chemicals Found in Wyo. Drinking Water Might Be From Fracking

EPA Launches National Study of Hydraulic Fracturing

Natural Gas Drilling: What We Don’t Know

Buried Secrets: Is Natural Gas Drilling Endangering U.S. Water Supplies?

And read all of our natural gas reporting on the ProPublica “Buried Secrets” series page.

by Dan Nguyen

It may still be summer, but ProPublica had one of its most word-dense (and picture-dense, and video-dense) weeks ever. Each day we published an in-depth story or notable development in our ongoing investigations. Here’s a rundown in case you missed some of our work.

Monday, Aug. 23

Overseeing the Gulf Spill Claims Overseer: BP handed control of the spill claims process over to independent paymaster Kenneth Feinberg. We’re watching to see if Feinberg’s promises are enacted, and whether or not they improve on BP’s management.

• Read our article on Feinberg’s proposed reforms.
• We’ve created a widget to track the claims payout, which you can embed in your own website.
• If you’re a claimant, we’re interested in hearing about your experience with the claims process.
• Also in Gulf spill news, if you wondered why we leaned toward a half-glass-empty attitude toward the claims of a recent the-Gulf-is-mostly-empty-of-oil study: it was funded by BP.

Tuesday, Aug. 24

“Do What You Have To Do”: In the chaotic days after Hurricane Katrina, New Orleans police were told they could shoot looters, according to former and current members of the force. We co-reported this story with the Times-Picayune and PBS Frontline as part of our ongoing investigation into the post-Katrina breakdown of law and order, including 11 officer-involved shootings of civilians.

• Read the article about the NOPD’s orders to shoot looters.
• Watch the PBS Frontline documentary, “Law & Disorder,” the culmination of our yearlong collaborative investigation into the officer-involved shootings in the days after Katrina.
• Watch an interview with reporter A.C. Thompson by PBS NewsHour.
• On Thursday, the Times-Picayune broke the news that federal agents began an inquiry on the NOPD’s shooting orders.

Wednesday, Aug. 25

A Modification Denial, Modified: Last week, we profiled Suzanna Wertheim, a California homeowner recently diagnosed with terminal cancer who said a series of mistakes by Wells Fargo had prevented her from getting her mortgage modification. After our story, and Wertheim’s appearance on “The Rachel Maddow Show", Wells Fargo offered her a modification.

Read Suzanna Wertheim’s profile and the update to her situation.

• Read our third profile in the series: Wallace Farmer, a homeowner who gave up on getting a modification after a year of bureaucratic holdups.
• We also updated our colorful chart showing the state of the government’s loan modification program with the latest monthly Treasury data. Reporter Paul Kiel’s take: The numbers are getting bleaker.

Thursday, Aug. 26

The German Connection: For nearly two years, a German company has argued that it can’t be sued for the defective drywall shipped by one of its Chinese subsidiaries. But our investigation with the Sarasota Herald-Tribune found documents showing that the German umbrella company was closely involved in managing its subsidiaries, including quality control and raw materials procurement.

• Read the article, “Documents Tie German Company to Chinese Subsidiary That Produced Defective Drywall.”
• Read our ongoing investigation of drywall that has made homes uninhabitable, and the tainted drywall’s manufacturers and distributors.

Friday, Aug. 27

Welcome to CDO World: Reporters Jake Bernstein and Jesse Eisinger, in partnership with NPR’s Planet Money, reveal how Wall Street bankers “perpetrated one of the greatest episodes of self-dealing in financial history.”

Their analysis shows for the first time how much banks, primarily Merrill Lynch, created a demand for otherwise hard-to-sell collateralized debt obligations by buying up their own product.

• Read our investigation, “Banks’ Self-Dealing Super-Charged Financial Crisis.”
• Need visual clarity? We chart the extent of Merrill Lynch’s self-dealing, self-dealing broken down by each CDO and the CDO daisy chain.
• Listen to the story on NPR: “How Wall Street Made the Mortgage Crisis Worse.”
• For some comic (strip) relief, read “Welcome to CDO World!”, our illustrated guide to the financial shenanigans. And the Gregory Brothers, of Auto-Tune the News, auto-tuned the bankers.
• Blogger Marian Wang put together a crib sheet of the CDO names and narratives.
• The first part of our CDO investigation, “The Magnetar Trade”, also featured an NPR collab (with This American Life) and inspired its own song, “Bet Against the American Dream.”

Tainted Trials: The New York Times editorialized that torture had jeopardized the government’s ability to convict accused terrorists, based on our report (co-published with the National Law Journal) on how the government has lost eight of the 15 cases in which Guantanamo inmates alleged mistreatment.

• Read our report, “Judges Reject Interrogation Evidence in Gitmo Cases.”
• See our list of the 15 lawsuits in which Guantanamo inmates claimed abusive interrogations.
• We’re also maintaining a database of the 50-plus Guantanamo detainee lawsuits that have been decided by federal judges.

Rethinking Fracking : PBS's "Need to Know" will feature our reporting on hydraulic fracturing (aka "fracking"), a method of natural gas drilling that may pose risks to our water supply.

• Watch the episode tonight (check local listings)
• Read our complete coverage of hydraulic fracturing.

by T. Christian Miller, ProPublica, and Daniel Zwerdling, NPR

WASHINGTON, D.C.--After conducting his own investigation into medical care at one of America's largest Army bases, Rep. Harry Teague promised to dramatically expand an inquiry into the treatment of soldiers who have suffered mild traumatic brain injuries in Iraq and Afghanistan.

In a letter to medical commanders at Fort Bliss, the third-largest Army base in the country, Teague, D-N.M., wrote that he had turned up troubling evidence of systemic problems across the military in the treatment of soldiers suffering lingering cognitive difficulties as a result of roadside blasts.

Teague launched his inquiry after an investigation in June by NPR and ProPublica found that the military's medical system had failed to diagnose and treat tens of thousands of soldiers that had suffered mild traumatic brain injuries, often called one of the wars' signature injuries. The reports also found that soldiers had to fight for treatment at the military hospital at Fort Bliss, a base in El Paso, Texas that sprawls into Teague's district.

Teague said he planned to ask the Government Accountability Office, Congress' investigative arm, to conduct a "comprehensive examination" of the care provided to soldiers with traumatic brain injuries in the Defense Department and Veterans Affairs' medical systems.

"I am concerned that Fort Bliss, and by extension the military, is not adequately identifying, assessing, and treating patients with mild to moderate TBI case," Teague wrote.

A spokeswoman for the Pentagon said today that they were reviewing the letter. A Fort Bliss hospital spokesman said base commanders have not yet had time to respond to Teague's concerns.

The hospital's former commander had promised a "thorough review" of the care and treatment of soldiers after the NPR and ProPublica stories. A Fort Bliss spokesman said Friday he does not know if the review has been conducted.

Official military figures show that about 115,000 troops have suffered mild traumatic brain injuries since 2002. But based on interviews and unpublished military studies, we found evidence suggesting that tens of thousands go undiagnosed or sustain injuries that are never documented. Mild traumatic brain injuries, also known as concussions, are often referred to as invisible wounds because they are difficult to detect and leave no visible scars.

While most soldiers with concussions recover, civilian studies indicate that between 5 percent and 15 percent of people who suffer mild traumatic brain injuries have lingering cognitive problems. Unpublished studies of soldiers echo those findings. Such soldiers have trouble remembering, following directions or doing more than one task at a time.

Teague said that he had several concerns about the state of care at Fort Bliss. He said his investigators found that the Fort Bliss program had not been accredited by the Commission on the Accreditation of Rehabilitation Facilities, a leading trade organization.

He also said he was concerned that Fort Bliss did not have enough staff to treat the more than 1,100 soldiers who were diagnosed on base last year as suffering continuing problems from mild traumatic brain injuries. All in all, Teague wrote, soldiers with mild traumatic brain injuries were not receiving a high level of medical care.

He said that Fort Bliss and the military medical system needed to develop a comprehensive system of rehabilitation to help soldiers with continuing problems as a result of sustaining concussions.

"Our response to the epidemic of TBI among our service members and veterans should be overwhelming and unambiguous," he wrote. "The U.S. government should marshal every resource to treat and heal the invisible wounds of our current wars in Iraq and Afghanistan."

by Marian Wang

Last night, we published a story about self-dealing by the big Wall Street banks, cashing in on the world of structured finance. We know the subject matter is heady stuff, so together with our partners at NPR’s Planet Money, we’ve tried to make it as digestible as possible — with our first-ever cartoon, colorful charts (or “lovely chart porn,” as described by Barry Ritholtz), and an Auto-Tune song about the banks.

Felix Salmon at Reuters, Ritholtz at The Big Picture and The New York Times’ Dealbook also have smart takes that you should be sure to catch.

But for those of you who, unlike Felix Salmon, don’t care to read all the “juicy details” about the specific CDO names and narratives in the full story, we’ve pulled out some of the basic questions and answers right here.

The setup:

As the housing boom slowed in mid-2006, the big banks on Wall Street had a problem. They’d created a lucrative money machine by buying and selling bundles of mortgage bonds known as collateralized debt obligations, or CDOs, but investors were getting more and more nervous about the product as they noticed high default rates on mortgages and worried about the quality of the assets stuffed into the CDOs.

Why was this a problem?

This was a problem for the banks for a few reasons. Banks still had pieces of un-bundled assets on their books — likely to lose value because of flagging demand, which would incur losses to the bank.

And then bankers in particular were making some pretty sweet bonuses for every CDO deal they struck. From our story:

A typical CDO could net the bank that created it between $5 million and $10 million -- about half of which usually ended up as employee bonuses. Indeed, Wall Street awarded record bonuses in 2006, a hefty chunk of which came from the CDO business.

In other words, there was still a lot of money to be made if they kept the CDO market going. So they found a way to do so — artificially. They created fake demand.

How?

The banks kept creating CDOs. The nature of CDOs, however, is such that they’re tiered, based on risk as assessed by the rating agencies (which, as we now know, often caved to pressure from the banks).

The banks didn’t have a problem holding on to the top-tier assets (the top 80 percent of a CDO, considered “super senior”) because they figured they were safe. But with each CDO, there were still the riskier, bottom-tier assets — assets that they wanted others to take.

So they began using those risky parts of CDOs in other CDOs. As my colleagues describe it, it became “a daisy chain that solved one problem but created another.” From the story again:

An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds.

CDOs often bought pieces of each other — a sort of you-buy-my-stuff, I’ll-buy-yours:

A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.

Which banks did this self-dealing?

Merrill Lynch did it the most, but many others did as well, including Citigroup, UBS and Goldman Sachs.

Really, this chart just about says it all.

Were there protections against this happening?

You may recall that when the SEC sued Goldman Sachs for civil fraud in April, one of the regulator’s biggest issues with the bank was that it represented to investors that a third-party CDO manager called ACA was choosing the assets that went into the CDO, and that ACA’s interests were aligned with that of investors.

The SEC alleged that in fact, both Goldman and the hedge fund Paulson & Co. — which had interests different from those of investors — had undue influence in choosing what went into the CDO, and that this fact was never disclosed to investors.

CDO managers, like ACA, were meant to act in the interests of investors, protect against abuse and pick assets that would help the CDO perform well. But as Goldman’s Abacus deal and many of the deals in our story illustrate, that’s seldom how it worked:

The managers were beholden to the banks that sent them the business. On a billion-dollar deal, managers could earn a million dollars in fees, with little risk. Some small firms did several billion dollars of CDOs in a matter of months.

As we’ve said, Merrill Lynch was particularly notorious among CDO managers for vetoing their choices when non-Merrill assets were suggested:

"All the managers complained about it," recalls [Fiachra] O'Driscoll, the former Credit Suisse banker who competed with other investment banks to put deals together and market them. But "they were indentured slaves." O'Driscoll recalls managers grumbling that Merrill in particular told them "what to buy and when to buy it."

They obviously weren’t the only ones:

A little-noticed document released this year during a congressional investigation into Goldman Sachs' CDO business reveals that bank's thinking. The firm wrote a November 2006 internal memorandum about a CDO called Timberwolf, managed by Greywolf, a small manager headed by ex-Goldman bankers. In a section headed "Reasons To Pursue," the authors touted that "Goldman is approving every asset" that will end up in the CDO. What the bank intended to do with that approval power is clear from the memo: "We expect that a significant portion of the portfolio by closing will come from Goldman's offerings."

What were the ramifications of this self-dealing on the larger financial system?

Ultimately, the fact that so many CDOs contained pieces of each other and that so many were created for the purpose of sweeping risky assets off the books of investment banks meant that the market was impossibly intertwined and fragile.

“Partly because CDOs had bought so many pieces of each other, they collapsed in unison,” we noted in our story.

And while bankers and CDO managers took home their bonuses from the deals they spurred with artificial demand, the banks themselves, as we mentioned, had either incorrectly assumed that the “super senior,” or top, tier of the CDO was safe to hold on to or had been unable to get rid of those assets fast enough. That meant some of the biggest self-dealers — Merrill and Citigroup — both lost billions:

Nearly half of the nearly trillion dollars in losses to the global banking system came from CDOs, losses ultimately absorbed by taxpayers and investors around the world. The banks' troubles sent the world's economies into a tailspin from which they have yet to recover.

What are the banks’ responses to this?

When asked, the banks answered in broad strokes, never directly addressing our questions:

Asked about its relationship with managers and the cross-ownership among its CDOs, Citibank responded with a one-sentence statement:

"It has been widely reported that there are ongoing industry-wide investigations into CDO-related matters and we do not comment on pending investigations."

None of ProPublica's questions had mentioned the SEC or pending investigations.

Posed a similar list of questions, Bank of America, which now owns Merrill Lynch, said:

"These are very specific questions regarding individuals who left Merrill Lynch several years ago and a CDO origination business that, due to market conditions, was discontinued by Merrill before Bank of America acquired the company."

Will anyone be held accountable?

It’s not clear whether any of this was illegal, but regulators are looking closely at the CDO business and scrutinizing what kind of pressure the banks may have exerted on CDO managers.

The SEC has said it’s looking “at as many as 50 CDO managers as part of its broad examination of the CDO business' role in the financial crisis.”

by Marian Wang

Earlier this week, major news outlets ran with headlines about how a new microbe has been found eating up BP’s oil, and how microbes have degraded the hydrocarbons so efficiently that the vast plumes of oil in the Gulf are now undetectable. No joke.

A bit skeptical of all the oil-is-mostly-gone claims, the day that microbe study was released we chose instead to focus on the Gulf’s thousands of dead fish. Lucky for us.

MIT’s Science Tracker, in a post published yesterday, noted that the microbe study was conducted by U.C. Berkeley scientists through a grant with the Energy Biosciences Institute, and that the Energy Biosciences Institute is funded by none other than BP, through a $500 million, 10-year grant. (To the researchers' credit, they also mentioned the funding in their press release — you just had to read about three-quarters of the way through.)

That relationship shouldn't have been a total surprise. In July, news reports had noted the U.C. Berkeley-BP connection. Activists had protested the $500 million in funding, worried that the funding source would influence the science. The response from U.C. Berkeley? From the Associated Press, emphasis added:

But UC Berkeley officials say the institute has nothing to do with the Gulf spill, and the university has no plans to end its research partnership with BP.

That was late July — less than a month before Berkeley Lab scientist Terry Hazen announced that his team’s research found that the deep water plumes “went away fairly rapidly after the well was capped.”

While having BP as a funding source doesn’t invalidate the research, in the very least it’s probably at least worth mentioning in the same breath.

Separately, a scientist from the Woods Hole Oceanographic Institution, which produced plume findings two weeks ago, made the point that sometimes both scientists and reporters overreach when describing research — scientists to have their work recognized, and reporters to make a story sound more impressive, or in the case of the Gulf, to fit a more exciting narrative that pits scientists against each other.

“The research added new information to an unfolding investigation, but the media seemed more interested in whether our work decided whether NOAA or the Georgia group was right,” Christopher Reddy, a Woods Hole scientist, wrote on CNN regarding his experience sharing research with the press.

For the record, here’s what we wrote about the Woods Hole study:

And then I know we pointed this out on Wednesday, but independent scientists kept piling on the research this week about their own spill findings — some outright contradicted the government’s report; others added to what we know about the oil’s movement and location.

The latest, released Thursday, seems to fall into the latter category. Scientists at the Woods Hole Oceanographic Institution measured a plume of dispersed oil that’s “at least 22 miles long and more than 3,000 feet below the surface of the Gulf,” they announced. The Wall Street Journal noted that’s the size of Manhattan.

Readers can judge where we stand in this debate.

by Marian Wang

We’ve noted that the passage of the Dodd-Frank financial reform bill left much still to be determined by regulators in later rulemaking. The SEC’s ruling Wednesday on the “proxy access rule” is a perfect example.

Fought over during financial regulation negotiations, it was ultimately left out — the bill instead gave authority to the SEC to make rules, and yesterday, the SEC voted on party lines, 3-2, to give shareholders more power to nominate directors to the corporate boards of publicly traded companies. 

The new rule “requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots [or the proxy] distributed before shareholder annual meetings,” according to The Wall Street Journal. That’s far easier on shareholders than the current process, which the Journal describes:

Currently, shareholders who want to oust board members must foot the bill for mailing separate ballots, as well as wage a separate campaign to woo shareholder support. Both are too costly and time-consuming for most. Now, the targeted companies will essentially be footing the bill for the dissidents, including them in the official proxy materials. The new rule will be in place in time for the 2011 annual meeting season next spring.

After the passage of the financial reform bill, we spoke with former SEC Chairman Arthur Levitt, who said that in his opinion, shareholder access to the proxy was the most important omission from the bill, because “ as the system has been structured, shareholders have no say in the management of the company except in very, very unusual circumstances.”

Under the new rule, shareholders will be eligible to nominate a candidate only if they hold at least 3 percent of the company’s shares and have had them for at least three years. (The number is significant because during financial regulation negotiations, one of the proposals had been a 5 percent threshold, which some believed would negate the point of the rule by limiting the additional influence only to larger investors.)

While the SEC’s new action is being hailed by investor groups as an overdue victory, the Financial Times noted that business groups are already lining up to use “every method available” to fight the rule.

The U.S. Chamber of Commerce — the industry group that earlier tried to mobilize grassroots opposition to the rule among small business owners for whom the rule would not directly apply — issued a press release that criticized the SEC and called the new rule a “giant step backwards.” It argued that proxy access would give “special interests the ability to hold the board hostage on narrow issues at the expense of other shareholders.”

by Marian Wang

About a month ago, Homeland Security began reviewing and moving to dismiss deportation cases against suspected illegal immigrants without serious criminal records, according to The Houston Chronicle. It’s not just happening in Houston, either. Here’s the Chronicle:

Raed Gonzalez, an immigration attorney who was briefed on the effort by Homeland Security's deputy chief counsel in Houston, said DHS confirmed that it's reviewing cases nationwide, though not yet to the pace of the local office. He said the others are expected to follow suit soon.

Gonzalez, the liaison between the Executive Office for Immigration Review, which administers the immigration court system, and the American Immigration Lawyers Association, said DHS now has five attorneys assigned full time to reviewing all active cases in Houston's immigration court.

Gonzalez said DHS attorneys are conducting the reviews on a case-by-case basis. However, he said they are following general guidelines that allow for the dismissal of cases for defendants who have been in the country for two or more years and have no felony convictions.

This shouldn’t come as too much of a shocker. The Obama administration and Immigration and Customs Enforcement have been up front about prioritizing the deportation of undocumented immigrants who are criminal offenders. The method, however, may be new. As The Washington Post reported last month, the administration’s main mechanism for the prioritization of criminal illegal immigrants has been to shift away from work-site raids and toward a program called Secure Communities.

Secure Communities, as The New York Times describes it, helps authorities check an arrested person’s immigration history through a government database. It’s increasingly being implemented across the country despite the objections of immigration advocates (who say most of the program’s deportations are of immigrants who aren’t violent criminals) and immigration foes (who aren’t in favor of letting non-criminal undocumented immigrants escape deportation, period).

“Even the ones who haven't committed murder or rape or drug offenses, all of them have committed federal felonies,” Mark Krikorian, executive director of the Center for Immigration Studies, a think tank that favors tighter restrictions, told the Post.

So it’s no wonder that Krikorian wasn’t too pleased at the news that deportation cases were being dismissed for non-criminal immigrants. He told the Chronicle that the administration has “made clear that they have no interest in enforcing immigration laws against people who are not convicted criminals.”

A quick review of Homeland Security statistics compiled by the Post, however, shows that deportations have been higher under the Obama administration than under Bush. Deportations in 2009 reached a high of nearly 390,000 and will likely be higher in 2010. Criminal deportations rose 19 percent from 2008 to 2009, and as of June 7, were about half of this year’s total deportations.

Under Obama, the backlog in immigration cases has also reached record levels, according to recent data from Syracuse University’s Transactional Records Access Clearinghouse. In mid-June, about 248,000 were pending in immigration courts. Suzy Khimm, writing for Ezra Klein's policy blog at the Post, pointed out the backlog in a post this week. (The backlog in Houston's immigration courts was eighth highest in the country, with 7,444 cases pending.)

Immigration attorneys told the Chronicle that these deportation case dismissals still leave their clients in legal limbo — they haven't been expelled, but they haven't been granted any additional rights, so it's not "backdoor amnesty," as critics claim.

Congress and the Obama administration recently added additional law enforcement at the border, but whether this will result in more deportations may depend on whether the backlog persists. Given that many immigration judgeships still remain vacant, as TRAC has noted, it seems quite probable, unless dismissals by Homeland Security happen to bring some relief.

by Joaquin Sapien and Christian Salewski, ProPublica, and Aaron Kessler, Sarasota Herald-Tribune

Knauf Gips, a family-owned German company with operations throughout the world, has argued for almost two years that it is not legally responsible for the millions of pounds of defective drywall that one of its subsidiaries in China has admitted exporting to the United States.

But documents filed in Germany and in U.S. courts show that Knauf’s German umbrella company is closely involved in the management of its subsidiaries, including overseeing quality control, finding raw materials and dealing with rising concerns over the defective drywall.

Founded in 1932 by brothers Alfons and Karl Knauf, Knauf Gips – the Knauf group’s gypsum products division – is still owned and operated by the descendants of Alfons and Karl. In 2008, the Knauf group had 331 subsidiaries and 22,000 employees, according to financial documents Knauf filed in Germany in March. Its operations include factories in Iran, Russia, Indonesia and the United States. Last year, the Knaufs ranked 14th on a list of Germany’s wealthiest people published by Manager Magazin, one of Germany’s leading business magazines.

Knauf officials declined to be interviewed for this article. But according to the financial documents (in German), the company’s executive board believes that lawsuits filed against Knauf Gips in U.S. courts “are not enforceable.”

Dozens of companies are being sued for manufacturing the defective drywall that has contaminated thousands of U.S. homes, including Taishan Gypsum Co. Ltd., a company with direct ties to the Chinese government. But Knauf appears to be the largest manufacturer on the list of defendants and is thought to have the deepest pockets. In 2008, the year for which the most recent figures are available, its revenue was more than $6.6 billion, according to its filings in Germany. The revenue of its Chinese subsidiaries, which are also being sued, is only a tiny fraction of that amount. According to the German documents, all of Knauf’s Asia, Middle East and Africa subsidiaries had only $369 million in revenue in 2008.

Knauf says that only one of its Chinese subsidiaries – Knauf Plasterboard Tianjin – produced any of the defective drywall and that it is the only Knauf company that can be held financially responsible.

The bulk of the defective drywall arrived in the United States between 2005 and 2007, at the height of the U.S. building boom. It releases high levels of sulfur gases, which can trigger respiratory problems, erode wiring and and cause refrigerators, air conditioners and other electronics to fail. The Consumer Product Safety Commission, which is leading the federal government’s investigation of the problem, has received more than 3,500 complaints from U.S. homeowners about defective drywall. To repair the problem, the CPSC says, the homes should be gutted and all the drywall and wiring removed.

Shipping records analyzed by the Herald-Tribune in Sarasota, Fla., and ProPublica show that since January 2006, three of Knauf’s Chinese subsidiaries have sent more than 100 million pounds of drywall to the United States under their own names, including about 55 million pounds from the Tianjin plant.

However, Knauf Tianjin also shipped large quantities of drywall to the U.S. under the name of third-party exporter Rothchilt International, so it’s difficult to determine how much Knauf drywall was actually imported into the United States. Knauf officials have repeatedly declined to clarify those details.

According to websites that Knauf maintains for its Czech and Swiss subsidiaries, Knauf bought a Thai company’s stake of the Tianjin plant in 1999. The company that sold the plant to Knauf filed a statement with the Thai stock exchange indicating that the stake was 70.93 percent.

A 2003 book that Knauf published about the firm indicated it owns 100 percent of the other two Knauf subsidiaries that are defendants in the U.S. case.

In a statement to ProPublica and the Herald-Tribune, one of Knauf Tianjin’s American attorneys, Steven Glickstein, stressed the legal separation between the German parent company and Knauf Tianjin.

“It is common for management and employees of the affiliated companies to communicate with each other, to have consolidated financial statements and to have relationships with one another,” Glickstein said. “However, this does not change the fact that each corporation is a separate legal entity, responsible only for its sales and its own products.”

Knauf used a similar argument in 2002, when the European Commission fined it about $108 million (in current U.S. dollars) for conspiring with three competitors to artificially inflate the cost of drywall. Knauf appealed the fine, arguing that Knauf Gips was responsible for the price-fixing, and that Knauf Gips and the Knauf group shouldn’t be considered “the same economic unit.” Last month the European Court of Justice rejected Knauf’s appeal.

“The companies belonging to the Knauf family constitute an economic unit,” the Court of Justice said. “Knauf Gips KG should be considered to be responsible for all the activities in the Knauf Group.”

Attorneys representing U.S. homeowners have argued in a court filing that the European ruling “makes it abundantly clear that Knauf Gips controls all of the Knauf entities.”

Ulrich Börger, who practices international law in Hamburg, Germany, for New York City-based Latham & Watkins, said that “often American plaintiffs’ attorneys gladly try to implicate parent corporations because they have the deeper pockets.” But to succeed, the plaintiffs’ attorneys “have to prove concrete misconduct by the parent corporation,” said Börger, whose firm is not involved in the drywall litigation.

Dan Harris, an attorney with Seattle-based Harris & Moore, which represents clients in both China and the U.S., said attorneys for the plaintiffs must determine “who made the big decisions? Who made the decision as to what would go into the drywall, China or Germany? Who made the decision with respect to testing that would be done on drywall to make sure it didn’t have problems?”

Isabel Knauf, a granddaughter of one of the founders and manager of Knauf’s operations in the Mediterranean and Asia, addressed quality control when she spoke at a 2007 conference in the city of Tianjin in 2007. “Quality in all Knauf manufacturing facilities in Asia will be rigorously controlled according to the strictest standards set up by our HQ in Germany,” she said, according to a press release that Knauf issued in Chinese after the event.

Ervin Gonzalez, a Florida attorney who represents some of the U.S. homeowners, said Knauf, a “multibillion dollar corporation, has tried to shy away from their responsibility. But we have the evidence that the parent is responsible for the Chinese company.”

It will be up to Judge Eldon E. Fallon, who is presiding over a multidistrict lawsuit in federal court in New Orleans, to determine whether the German parent or the Chinese subsidiary is financially liable for the drywall problem.

If the Chinese subsidiary alone is held responsible and refuses to pay, then the attorneys could move to seize the company’s U.S. assets. But after the drywall incident, Knauf Tianjin stopped doing business in the U.S., and it has no assets here to seize. That would leave the attorneys with the option of trying to collect in China, where U.S. judgments are rarely honored. Or getting the judgment enforced in a country where Knauf Tianjin does have assets. Or suing again – this time in China.

“None of these options are easy,” Harris said. “Knauf China could argue that you can’t sue us here, because you are already suing us in the U.S.”

The process would be far simpler if Fallon decides the German parent is liable. Knauf would still be able to argue that the U.S. court doesn’t have jurisdiction to force them to pay – but the plaintiffs would then have the option of asking a German court to enforce the judgment. According to Börger, if a German judge decides that the U.S. judgment was “issued in a fair trial, it can be enforced.” He said that process would take six months to a year.

Jörg Schanow, a member of the Knauf executive board who also serves as the company’s general counsel, declined to speak with ProPublica, saying he could not discuss matters that are subject to ongoing litigation.

But in December 2009 Schanow told the Frankfurter Allgemeine Zeitung, a leading German newspaper, that “whoever says the products are causing sickness claims something wrong or imagines it.” And in February 2010, he told the German business magazine WirtschaftsWoche that “Knauf KG is only mentioned in the complaint because of its financial power.”

First Complaints

In 2005, building material suppliers in the United States ramped up their importation of Chinese drywall to help rebuild the Gulf Coast after Hurricanes Katrina and Rita. By 2006 the demand for drywall was so high that Knauf began searching for new sources of raw materials for its factories.

“Those efforts were successful and the new suppliers now are serving the Knauf board factories continuously and with increasing amounts,” Knauf said in financial statements for the Knauf umbrella company, filed in Germany in 2008 for the year 2006.

Millions of pounds of Knauf drywall went to Banner Supply, one of Florida’s biggest drywall distributors. When Banner started getting complaints about the drywall from builders and installers in early November 2006, Banner contacted Mike Norris, Knauf Tianjin’s general manager, through its importer.

On Nov. 7, 2006, Norris received an e-mail from a Knauf Tianjin employee warning him that Knauf’s drywall could affect “thousands of houses.”

Norris quickly e-mailed five Knauf officials, asking how he should handle the problem.

“Any ideas on how I can resolve this I am getting a very slow reaction from Germany,” Norris asked. “It looks like it is going to get VERY nasty and expensive.”

Among those who received the e-mail was Isabel Knauf, manager of Knauf’s operations in Asia. The e-mail also went to Frederick Knauf, director of Knauf Trading Shanghai Co. Ltd., another Knauf subsidiary in China.

Isabel Knauf immediately urged Dr. Hans Ulrich-Hummel, Knauf’s head of research and development, to go to Florida, visit some of the affected homes and meet with Salomon Abadi, who owned the company that had brokered Banner's purchase of Knauf drywall.

“I think we need to show our face because this gets out of hand.” Isabel Knauf told Hummel on Nov. 7, after referring to a previous lawsuit against Knauf Insulation, its American-based subsidiary. “Please, pretty please with sugar on it, do this visit!”

Isabel’s sweet tone became sharper the next day.

“We have made it very clear to Soloman (sic) that if anybody wants to sue us, they will have to sue Knauf Tianjin in a Tianjin court,” she said in a note to Hummel, Norris and other Knauf officials. “However, for the reputation of Knauf in the market and to avoid that they sue Knauf’s American entity, we need to show up there and find out what the hell is going on.”

A few days later, Hummel, Norris and several scientists from an Arkansas-based environmental engineering firm flew to Florida and visited homes with Abadi and Banner Supply executives. According to Abadi’s sworn testimony, Hummel was in frequent communication with a “Mr. Knauf” in Germany, whom Abadi described as the “orchestra director.”

Norris also checked in with members of the Knauf family, according to sworn testimony from the Banner executives.

Norris later sent Banner and Abadi the results of the Arkansas firm’s study, which Norris said showed that the drywall didn’t pose a health risk.

In December 2006, Knauf Tianjin and Banner reached a confidential agreement that was revealed in May by ProPublica and the Sarasota Herald-Tribune. Knauf agreed to replace any of its Chinese-made product that Banner hadn’t sold with U.S.-made drywall. In exchange, Banner promised not to sue Knauf. Both parties agreed not to tell the government, media or the public about the deal.

Other documents filed in connection with the federal lawsuit also show that Knauf had financial and managerial ties with its Chinese subsidiaries.

In a 2006 e-mail, Tony Robson, who previously held Isabel Knauf’s position, informed his colleagues that management of the company’s Asian operations was being shifted to the Knauf family’s hands: “As you know the new structure involves the overall responsibility for our gypsum activities in Asia passing from myself to Isabel Knauf.”

Knauf Tianjin has said that it traced the drywall problem to a gypsum mine in China. Gypsum is the white sedimentary rock that is the primary ingredient in some forms of drywall. Knauf Tianjin attorneys said that for some reason gypsum from one mine contained a particularly high concentration of sulfur and that the company stopped using that mine after the problem was discovered.

But neither Knauf Tianjin nor its attorneys have provided documents to support that conclusion. Many of Knauf’s factories, including some in China, also produce drywall made from another form of gypsum, which is produced from coal ash that has been scrubbed from the smokestacks of coal-fired power plants for air pollution control.

Questioned Under Oath

Since the first drywall lawsuits were filed in early 2009, Knauf Tianjin’s attorneys have argued that Knauf Gips should be excluded from the lawsuit – and that Knauf officials in Germany shouldn’t be required to appear as witnesses – because Knauf Tianjin alone is responsible for the defective product.

But earlier this month, Judge Fallon ordered some of the witnesses to appear. He also ordered Knauf to turn over documents that the plaintiff’s attorneys had been trying to obtain for months.

Last week, at least one of the company’s employees flew to New York City and spent two days answering questions under oath from the plaintiff’s attorneys. Fallon issued an order saying information about the depositions could not be made public, so it’s unclear how many people testified or whether Isabel Knauf, who is included on the witness list, appeared.

At Fallon’s urging, the various attorneys involved in the case met on Tuesday to begin discussing a settlement. According to Russ Herman, a New Orleans lawyer who heads the plaintiff’s steering committee, they are negotiating a pilot program that would remediate 150 to 300 homes in the Gulf Coast that were built with Knauf wallboard. Details of the program are still being hashed out, but Herman said it would also involve insurers and suppliers.

Herman said the issue of whether Knauf Gips in Germany will be held responsible for the problem hasn’t been resolved.

ProPublica research director Lisa Schwartz contributed to this report.