The Obama Watch

The War on Watchdogs

Inspectors general fight for independence, while Obama brings the "Chicago Way" to Washington.

By From the September 2009 issue

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HOUSE OVERSIGHT COMMITTEE CHAIRMAN Rep. Edolphus Towns was clearly angered to learn that the Treasury Department had no idea what financial institutions were doing with taxpayer money they got from the Troubled Asset Relief Program (TARP), the $789 billion Wall Street bailout rushed through Congress in October 2008 amid panicky talk of a global economic meltdown.

Treasury Secretary Timothy Geithner's department had "taken the position that it will not even ask TARP recipients what they are doing with the taxpayers' money," the nine-term Democrat from Brooklyn said at a July 21 hearing of the committee. "In short, the taxpayers now have a $700 billion spending program that's being run under the philosophy of ‘don't ask, don't tell.'"

The chairman's fellow Democrat, Maryland Rep. Elijah Cummings, was similarly outraged.

"For us to get past this economic situation that we find ourselves in, the public has to believe that we're doing the right thing," Cummings said. "If we can't show them that we are doing the right thing with their money, we're going to have problems."

This sudden outburst of Democratic concern about fiscal responsibility was caused by the quarterly report issued a day earlier by "SIGTARP" Neil Barofsky, the special investigator general assigned to watchdog the banking bailout bonanza. By mid-July, Barofsky had already launched 35 separate criminal and civil investigations involving alleged misuse of TARP funds, and his report disclosed that Geithner wasn't even requiring the beneficiaries of the program to submit itemized accounts of where the money was going. So far as anyone at Treasury knew, American taxpayers were footing the bill to provide lingerie and jewelry for the mistresses of hedge-fund executives.

Barofsky's report landed like a bombshell on Capitol Hill amid a growing mood of bipartisan indignation fueled by evidence that the main result of the TARP bailout was to pad the bottom line of giant Wall Street firms. A week earlier, Goldman Sachs had reported record second-quarter profits of $3.4 billion, scarcely nine months after taking $10 billion in bailout money at the height of last fall's hysteria about a worldwide financial apocalypse. News of the earnings windfall at Goldman Sachs sparked a two-week stock market surge that saw the Dow Jones Industrial
Average gain more than 800 points, but it also contrasted starkly with projections of double- digit unemployment and rising home foreclosures. Clearly, the mood was ripe for one of those recurrent populist epochs that erupt whenever the ordinary American on Main Street gets the idea that fat cats on Wall Street are using their leverage in Washington to perpetrate a swindle.

And here was SIGTARP, testifying to a congressional committee that the Treasury Department was asleep at the switch. Chairman Towns railed, "Earnings at the largest banks and the bank holding companies such as JP Morgan and Goldman Sachs are up, yet lending remains down. It is unacceptable that profits go up, while lending goes down. The taxpayers have invested very large amounts of money in these banks, but what have we gotten in return?"

The committee's ranking Republican, California Rep. Darrell Issa, compared Geithner's refusal to impose transparency requirements to disgraced Ponzi schemer Bernard Madoff's assurances to the investors he bilked for millions: "Both Bernie Madoff and Treasury are saying ‘just trust me' without showing us the books."

SIGTARP demonstrated how a watchdog can bite, and the July hearing drew new attention to evidence that the Obama administration is trying to blind, muzzle, or neuter inspectors general like Barofsky, whose job is to expose "waste, fraud and abuse" in government agencies.

A month before Barofsky's committee testimony, Sen. Chuck Grassley (R-IA) had sent a letter to Geithner, asking about "a dispute over certain Treasury documents that were being withheld from SIGTARP auditors on a specious claim of attorney-client privilege." Grassley's letter went on to say that "this disagreement then escalated into broader questions about whether SIGTARP is subject to your direct supervision and direction." The fight to maintain the independence of IGs, to protect their status as watchdogs, not lapdogs, is emerging as one of the most important early battles of the Obama era.

LESS THAN SIX WEEKS BEFORE the Barofsky hearing, on Wednesday, June 10, Gerald Walpin was trying to take a nap in his car while his wife drove north on the New York Thruway en route to a judicial conference in Bolton Lake, New York. Walpin, 77, was the inspector general assigned to watchdog the federal AmeriCorps volunteer program. His nap was disturbed when his cell phone rang and the IG found himself talking to Norman Eisen, special counsel to the president for ethics and government reform. Eisen presented Walpin with a choice: resign or be fired. And the IG had exactly one hour to make that decision.

When Walpin asked the motive for this ultimatum, he says the White House lawyer told him that President Obama had decided it was "time to move on" and that the president wanted to have "someone else in that position." This was shocking enough, but doubly shocking considering that only a year earlier, Obama had cosponsored a bill that required 30 days' notice to Congress before an IG could be terminated.

The White House ultimatum to Walpin-who has suggested his firing was provoked by his investigation of a charity founded by one of Obama's Democratic allies, Sacramento mayor Kevin Johnson-was the first shot fired in what soon began to look like a pattern of pressure against inspectors general.

Walpin's plight immediately came to the attention of Sen. Grassley, widely known as the congressional patron saint of IGs and other government whistle-blowers. The day after Eisen's call to Walpin, Grassley sent a letter to the president, saying that he was "deeply troubled" by the quit-or-be-fired ultimatum. He noted that Walpin had "identified millions of dollars in Americorps funds either wasted outright or spent in violation of established guidelines," and said, "In other words, it appears he has been doing his job."

In doing his job, however, Walpin had unearthed the misappropriation of hundreds of thousands of dollars of AmeriCorps grants to Johnson's St. HOPE Academy. According to the Associated Press, Walpin discovered that Johnson-a former NBA star elected mayor of California's capital city last year in a campaign consciously modeled on Obama's-had used AmeriCorps funding "to pay volunteers to engage in school-board political activities, run personal errands for Johnson and even wash his car."

Walpin's report resulted in Johnson and St. HOPE being suspended last year from receiving further federal funding. In March, an article in the Sacramento Bee raised concerns that, because of Johnson's suspension, the city might be denied its share of the $787 billion economic stimulus package passed by Congress in February. Meanwhile, Walpin had referred his findings to the U.S. attorney's office in Sacramento, expecting that "suspension and debarment" of St. HOPE and Johnson would be made permanent. However, the acting U.S. attorney, Lawrence Brown, chose not to prosecute Johnson (or anyone else) for the misuse of federal funds, and instead reached an agreement with St. HOPE that would have it repay approximately half of the $825,000 in federal grants received by Johnson's charity, which would remain eligible for funding. Walpin went public with his criticism of this settlement, and the U.S. attorney responded by filing a complaint April 29 with the Integrity Committee of the Council of Inspectors General on Integrity and Efficiency, which oversees IGs, accusing Walpin of bias and unprofessional conduct.

The dispute over St. HOPE brought Walpin into conflict with the board of the Corporation for National and Community Service (CNCS), which oversees AmeriCorps. The board had excluded Walpin from its negotiations with Johnson and the U.S. attorney over
the settlement. Walpin met with the CNCS board on May 20, the same day it was reported that a former St. HOPE associate of Johnson's had alleged that e-mails relevant to the investigation had been deleted. Walpin threatened to go public with his demands for further investigation.

Walpin's threat presented a serious problem for the CNCS board, which Byron York described in the Washington Examiner: "As a favorite program of Barack and Michelle Obama, AmeriCorps was enjoying a higher profile than ever before. The Corporation also stood to receive vast amounts of new funding from the $5.7 billion Edward M. Kennedy Serve America Act, which would triple the size of AmeriCorps. And in the midst of that, here was the agency's inspector general saying he might re-open an investigation into an embarrassing episode involving hundreds of thousands of mis-spent dollars and a politically prominent supporter of the president."

Less than three weeks later, Eisen called Walpin and delivered the president's quit-or-be-fired ultimatum. When Grassley complained, the White House responded that the president no longer had "the fullest confidence" in Walpin. Three days later, Grassley sent a letter to Alan Solomont, a Democratic contributor whom Obama had appointed as chairman of the CNCS board, requesting documents relevant to Walpin's dismissal. Intriguingly, among the documents Grassley requested were those involving "contacts with officials in the Office of the First Lady." And, Grassley wrote in conclusion, "No records related to these matters shall be destroyed or otherwise made inaccessible to Congress."

The White House responded two days later by attacking Walpin, saying that the inspector general had become "confused" and "disoriented" during his May 20 meeting with the CNCS board. This attempt to portray the septuagenarian IG as senile quickly backfired when Walpin was interviewed on Fox News and CNN, appearing dapper, keen-witted, and entirely sympathetic.

EVEN AS CONSERVATIVES RALLIED around the silver- haired Walpin, however, other cases of pressure against IGs emerged, suggesting that the Obama administration had brought to Washington the notorious "Chicago Way" of corrupt hardball politics.

Judith Gwynn was inspector general for the International Trade Commission. In her April semiannual report to Congress, Gwynn said that "in the course of conducting an investigation regarding contractor activities, certain procurement files were removed forcibly from the possession of the Inspector General by a Commission employee." On June 16, Grassley sent a letter to ITC chairwoman Shara Aranoff asking questions about this incident, and also asking about the unusual arrangement whereby Gwynn was serving as IG on a six-month contract. "I am unaware of any other agency Inspector General that serves under such a constraint and am curious to learn what statutory authority gives the ITC the ability to make a limited term appointment," Grassley wrote. Within hours of the delivery of Grassley's letter via e-mail, Gwynn said, she was told her contract as IG would not be renewed.

Then, on June 18, Amtrak IG Fred Weiderhold Jr. suddenly and unexpectedly retired. Weiderhold subsequently told congressional investigators that he had decided to retire during a meeting at which he presented the Amtrak board with a 94-page report documenting a pattern of interference with his investigations. The report, prepared by an outside legal firm at Weiderhold's request, recounted how Amtrak's legal department had sought prior review of documents the IG's office had subpoenaed. In some instances, these documents were delivered with sections redacted, and Amtrak had also sought to prevent IG staff from communicating with Congress without prior permission from management.

A week later, Grassley made the report public and sent a letter to Amtrak chairman Thomas Carper saying that the report showed "a long-term and unrelenting interference with the activities and operation" of Weiderhold's IG office, indicating "that Amtrak's policies and procedures have systematically violated the letter and the spirit of the Inspector General Act."

This was the most direct and serious accusation so far in a developing pattern that was already being called the "IG-Gate" scandal. And the Amtrak case proved to have some big-name connections. Much of the interference with the IG's investigations came from Amtrak's legal department, headed by the passenger rail service's vice president and general counsel, Eleanor "Eldie" Acheson. The granddaughter of Harry Truman's secretary of state, Dean Acheson, Eldi" had been Hillary Rodham Clinton's roommate at Wellesley College. (Very much "out" as a lesbian, Acheson was a featured speaker at a June 23 "Lesbian, Gay, Bisexual and Transgender Pride" celebration at the State Department, where Mrs. Clinton is now secretary.) After becoming general counsel at Amtrak in 2007, Acheson appointed as her deputy counsel Jonathan Meyer, who spent six years as a top Senate aide to Joe Biden. For years, Biden has been Washington's most outspoken advocate of the rail service that taxpayers subsidize to the tune of more than $1 billion annually. Conveniently enough, Biden's son Hunter serves on the Amtrak board, and it was Vice President Biden who on March 13 announced that Amtrak would receive $1.3 billion in stimulus funds.

As with Michelle Obama's advocacy for AmeriCorps, then, Amtrak has connections to some very influential Democrats, inevitably raising suspicions that the crackdown on IGs was not entirely random. Republicans familiar with the investigations of IG-Gate warned about attempts to "play connect-the-dots" in conspiracy-theorist manner. Some of these same Republican sources, however, also see a larger pattern in Obama's war against watchdogs. With Washington pumping out billions of stimulus and bailout dollars, there appears to be an effort to prevent IGs from asking too many troublesome questions about how all this tax money is spent.

IN JUNE, THE HOUSE PASSED the Improved Financial and Commodity Markets Oversight and Accountability Act, which would give the president authority to dismiss and replace inspectors general at five financial regulatory agencies: the Commodity Futures Trading Commission, the Board of Governors of the Federal Reserve, the Securities and Exchange Commission, the National Credit Union Administration, and the Pension Benefit Guaranty Corporation. The bill was sponsored by Rep. John Larson (D-CT), who argued that making these IGs presidential appointees would make them more "independent" and "ensure better performance from government agencies." The IGs themselves strongly disagreed, testifying in opposition to the bill. Among those who testified against the bill was the SEC's IG, David Kotz, whose hard-hitting reports have been praised by congressional investigators and whose report on the SEC's role in the Madoff scandal was due to be delivered to Congress in August. The Larson bill was also criticized by Danielle Brian, executive director of the Project on Government Oversight, which tracks government watchdogs. "I think you can be more independent reporting to a bipartisan board than being at the mercy of the president's good graces," Brian told the Washington Post.

If the Larson bill was opposed by the IGs themselves, and if presidential appointment might actually undermine, rather than enhance, the watchdogs' independence, what was the legislation intended to accomplish? That question was posed to me by a Republican congressional investigator who pointed out that Larson is a prominent "Friend of Chris"- that is, Sen. Chris Dodd (D-CT) who has come under intense criticism for his close, and perhaps corrupt, ties to the financial industry. Being a "Friend of Chris" may be entirely coincidental to Larson's IG bill, but it is certainly a curious coincidence at a time when the scandal-plagued Dodd is preparing for a tough 2010 reelection bid and will need more help than ever from the banking, investment, and insurance firms that have so generously contributed to his campaigns in the past. This is just one of several coincidences-like the First Lady's relationship to AmeriCorps and the vice president's relationship to Amtrak-that seemed to cluster around the IG story as it developed in the weeks following the White House ultimatum to Walpin.

Many conservatives saw in IG-Gate perhaps the first major scandal of the Obama administration.
Michelle Malkin, whose new book, Culture of Corruption, highlights the many shady ties of Team Obama, was paying close attention to the story on her popular blog and also in her nationally syndicated column. The Examiner's York produced mountains of reporting on the story, which was followed closely by Glenn Reynolds, whose Instapundit.com is one of the most-trafficked sites in the blogosphere. IG-Gate also got extensive coverage in major media outlets like the Washington Post (whose Ed O'Keefe bulldogged the story) and ABC News (where Jake Tapper did excellent reporting). Although the story didn't get front-page treatment in most of the media, it will continue to make headlines for months to come. Walpin himself guaranteed that July 17 when he filed a federal lawsuit seeking reinstatement as the AmeriCorps IG.

A lawsuit involves discovery, with subpoenaed documents and sworn depositions. That process presents all manner of legal jeopardy to any defendant who attempts to hide evidence or lie his way out of a jam. Perjury, obstruction of justice, conspiracy- such are the so-called process crimes so often associated with scandals in Washington.

Meanwhile, in late July, California blogger Eric Hogue stumbled across a March interview with Sacramento's KCRA-TV in which the local congresswoman, Democratic Rep. Doris Matsui, vowed not to let the mayor's AmeriCorps scandal stand in the way of the city getting its share of stimulus cash.

"Under any scenario, we are going to get the money. We are going to get the money," Matsui said, telling the interviewer that she had been in contact with White House officials about the issue that Walpin was at that time disputing with the U.S. attorney and the CNCS board. Did pressure from Matsui play a role in Walpin's firing? The fact that Hogue's blog post was brought to my attention by a Republican source close to the congressional investigation suggests that this question was being asked on Capitol Hill.

Many other questions were being asked on the Hill, and it is customary when these questions are put in writing to include the sort of notice that Sen. Grassley added in his letter to CNCS board chairman Solomont: "No records related to these matters shall be destroyed or otherwise made inaccessible to Congress." Obstructing a congressional inquiry is a serious matter, no matter how serious or trivial the inquiry may be. Given that the taxpayers are being billed billions of dollars for Obama's bailout-andstimulus economic agenda, the evident attempt of the White House to bring the "Chicago Way" to Washington could easily produce one of the grandest scandals since Teapot Dome.

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About the Author

Robert Stacy McCain is co-author (with Lynn Vincent) of Donkey Cons: Sex, Crime, and Corruption in the Democratic Party (Nelson Current). He blogs at The Other McCain.