THE "PORK" IN NEW YORK, Thoughts of an older American on Constitutional Government in the USA Options

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"Lake George contract ended - State agency fires company that crafted proposed environmental regulations, in unanimous vote"

By BRIAN NEARING, Staff writer, Albany, New York Times Union

First published: Wednesday, January 9, 2008

LAKE GEORGE -- The state agency responsible for Lake George stepped back Tuesday from proposed environmental rules meant to protect the water that gives the lake its legendary clarity.

By a 7-0 vote, the Lake George Park Commission terminated its contract with Saratoga Associates, a consulting firm that crafted regulations to limit clear-cutting of trees and shield vulnerable hillside streams.

While there was no debate, commission Chairman Bruce Young said later that his group wants "someone who could take a fresh look" at the proposals, which took Saratoga Associates more than a year to create.

Tuesday was the first time the commission had meet publicly since the proposals were made public in November.

As the first steps to protect streams and trees since the commission was created by the state in 1961, the proposals would have reduced land available for building around a lake where scenic hills contain more than 120 streams, and limited lawn size and views of many new high-end homes.

Included were a ban on tree-cutting up to 100 feet from dozens of streams that feed the lake, and a limit on tree removal on building sites.

The goal was to reduce the amount of sediments, fertilizers and pesticides being washed into a lake where more and more homes dot the hillsides.

In November, landowners and businesses from the lake's fastest-growing towns -- Bolton and Lake George -- decried the proposals as akin to land theft by regulation, while environmentalists said rules are needed to reverse the lake's worsening water quality.

Lake advocates were uneasy Tuesday about the departure of Saratoga Associates.

"This is a shame."

"It is a big step backward for lake protection," said Chris Navitsky of Lake George Waterkeeper, a local affiliate of the Riverkeeper environmental organization.

"We would hope that all this work does not just disappear," added James Hood, a spokesman for the Lake George Association, a 123-year-old nonprofit group that monitors lake issues.

Matt Rogers, an engineer with Saratoga Associates, said the company was waiting to hear from the commission whether the contract was going to be "completely closed out."

Commission members voting to withdraw the contract included Young, Thomas Conerty of Bolton, Thomas Morhouse of Ticonderoga, James Kneeshaw of Queensbury, Roger Phinney of Queensbury, Kenneth Parker of Diamond Point and Thomas Hall, a representative from the state Department of Environmental Conservation.

Brian Nearing can be reached at 454-5094 or by e-mail at bnearing@timesunion.com.

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"NY's Cuomo subpoenas Intel over competition questions"

By MICHAEL GORMLEY, Associated Press

Last updated: 6:23 p.m., Thursday, January 10, 2008

ALBANY -- New York Attorney General Andrew Cuomo is investigating possible violations of state and federal antitrust laws by Intel Corp., the worlds largest manufacturer of computer microprocessors.

A Cuomo spokesman said subpoenas were being delivered Thursday seeking information on whether Intel coerced customers to exclude Advanced Micro Devices, known as AMD, from the market for a specific computer processing unit.

Cuomo said his preliminary review showed a need for a full investigation.

The subpoenas seek data about Intel's pricing strategies and whether Intel penalized computer makers, cut off competitors' distribution channels, and improperly paid customers for exclusivity.

"Our investigation is focused on determining whether Intel has improperly used monopoly power to exclude competitors or stifle innovation," Cuomo said.

"We will also look at whether Intel abused its power to remove competitive threats or harm competition in violation of New York and federal antitrust laws."

Intel said no laws have been broken despite these latest of several actions worldwide that Intel believes are being driven by AMD, its closest competitor.

"We believe our business practices are lawful," said Intel spokesman Chuck Mulloy.

"We also believe the microprocessor market is a competitive market and is functioning the way one would expect a competitive market to function."

He said Cuomo's concerns mirror those in a lawsuit AMD filed against Intel in 2005.

The case is scheduled to be heard in a Delaware court in April 2009, Mulloy said.

Mulloy also said Intel filed its response this week to the European Union, which has a statement of objections after a six-year investigation.

Intel is also responding to preliminary charges by a regulator in Korea, he said.

AMD also has two private lawsuits pending against Intel in Japan, Mulloy said.

Japan's Fair Trade Commission said in 2005 that Intel violated fair trade laws -- a ruling the company accepted without admitting wrongdoing.

"In all cases, we denied we violated any laws," he said.

AMD spokesman Michael Silverman said the company believes Intel is engaging in illegal practices and regulators around the world are finding evidence of it.

Silverman said the loser is the consumer.

"The harm goes to innovation and consumer choice, the stunted growth of innovation," he said.

"If AMD is giving up markets to Intel, what does that mean for computer users looking for an alternative product?"

At issue in Cuomo's probe is whether AMD has a fair chance to supply its X86 computer processing units for desktop and laptop computers and servers.

Cuomo says Intel commanded 80 percent of the $30 billion market.

AMD's 2005 lawsuit claims Intel bullied major customers -- PC makers like Dell Inc. -- into exclusive deals and offering secret rebates.

The lawsuit alleged anticompetitive practices in several countries, including Britain, Germany and Japan.

Intel, which commands three-quarters of the worldwide microprocessor market, has denied AMD's allegations and defends its business practices as legal and beneficial to consumers.

In July, the European Union charged Intel with violating antitrust rules by selling its chips below cost to strategic customers, among other practices.

U.S. regulators, however, appear to be resisting a formal probe of Intel's marketing practices, despite requests from members of Congress and AMD.

In August, Sen. Charles Schumer and Rep. Kirsten Gillibrand asked the Federal Trade Commission to investigate the company.

A letter to the FTC from the New York Democrats said:

"If the allegations against Intel are true, the potential harm to consumers could be profound."

In a response in September, the FTC told legislators the agency is barred by law from disclosing investigations.

Schumer has met with AMD representatives about the company's plans to build a $3 billion semiconductor plant in upstate New York, a project strongly backed by powerful state Senate Majority Leader Joseph Bruno -- a Republican whose district includes the proposed site -- and Democratic Gov. Eliot Spitzer.

"Antitrust investigations into Intel are springing up everywhere except Washington," Schumer, a Democrat, said Thursday.

"The FTC needs to stop looking the other way on Intel and start getting serious about enforcing antitrust law."

Mulloy wouldn't comment when asked if he thought the support from New York lawmakers for AMD, and now the investigation by Cuomo, have anything to do with the plant AMD has proposed near Albany.

"I cannot speculate about the proposed factory in New York and this decision," Mulloy said.

Though AMD is the world's second largest maker of microprocessors, it's a much smaller company than Intel and has been struggling in recent years.

AMD's stock has taken a beating the past two years amid fears the Sunnyvale, Calif.-based company has been losing some of its competitive edge against Intel because of debt from a costly acquisition and because its technology is aging.

In October, AMD posted a loss of nearly $400 million for the quarter that ended in September.

Intel said it earned $1.86 billion in the same period.

Last month, AMD CEO Hector Ruiz said the chip maker is committed to breaking even in the second quarter of 2008 and returning to profitability in the third.

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On the Net:

http://www.oag.state.ny.us

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"Spitzer, industry pushing for more power plants to spur jobs"

By MICHAEL GORMLEY, Associated Press

Last updated: 6:23 p.m., Thursday, January 10, 2008

ALBANY -- Gov. Eliot Spitzer's promise this week to unlock, then speed the process to build more power plants to spur jobs and cut business expenses drew an assist Thursday from the industry.

Spitzer said he will push a bill to "fast track" the building of power plants in a small, but closely watched element of his State of State speech in which he listed his top priorities of the 2008 legislative session.

The more expansive and direct mention in this year's speech comes as Consolidated Edison of New York reports record energy use in New York City and Westchester County, economic engines for the whole state.

The demand was driven by construction of office buildings and homes and more use of electronics such as flat-screen televisions, games, computers and handheld devices.

Summer demand for electricity in New York and Westchester alone has grown by equivalent of powering an additional 200,000 homes per year according to Con Ed.

The need for reliable, less expensive power is an annual plea from businesses who pay some of the highest rates in the nation.

Cheaper electric rates are also seen as a key to retaining and attracting employers upstate.

"I will apply a simple principle: We must get more supply into the grid," Spitzer stated in Wednesday's State of the State address.

That part of the address by the Democratic governor drew support from power producers industry group.

"I thought the governor showed a willingness to compromise on a lot of these complex and difficult issues," said Gavin Donohue, CEO of the Independent Power Producers of New York.

"Clearly, economic development was the focus of this speech and energy is so intertwined."

Spitzer's director of state operations, Paul Francis, said Thursday that the passage in the State of the State speech was written more broadly to make room for a new chance at compromise in the Legislature.

Past efforts to renew a permit-granting process known as Article X have failed to gain approval by the Senate's Republican majority.

The years-long battle has pitted business interests against environmental activists.

"We can't make an energy sighting bill into an environmental regulatory bill," Donohue said.

"That's exactly what happened last year."

Spitzer, supported by both groups, didn't exclude the environmental concern in his speech.

He noted that a fast-track method of building new plants "must also help us confront the challenge of global warming."

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"Spitzer pushes lottery lease to fund higher education"

By MICHAEL GORMLEY, Associated Press

Last updated: 6:03 p.m., Thursday, January 10, 2008

ALBANY -- New York may try to cash in on the future its lucrative lottery as a way to create a permanent education fund, and Wall Street is interested in taking the bet.

The stakes are high for everyone, from students who could get better education to poor communities that might see more grocery money scratched away.

For state government, a long-term leasing for part of the lottery and part of its profits to a private investor for 30 or 40 years could attract a massive upfront payment, perhaps in the tens of billions of dollars.

Spitzer wants $4 billion of that upfront payment to create a permanent endowment for higher education.

That would yield $200 million a year from investments for the State University of York and its 64 state-run campuses.

The endowment would also guarantee the current $2.1 billion in lottery revenues devoted to public school aid, from pre-kindergarten through high school.

All of education funding would be indexed to grow annually, said Paul Francis, Spitzer's director of state operations.

But that index could be the rate of long-term growth in personal income, about 5.3. percent, which is more than the 2 percent growth the lottery is now producing.

Francis said the plan Gov. Eliot Spitzer laid out in his State of the State speech Wednesday would also guarantee the state its revenue over an uncertain future for lotteries.

Lotteries are facing increasing competition from other forms of gambling including casinos and Internet wagering.

The lottery currently provides $6.7 billion a year in revenue.

"The lottery is a business," Francis said Thursday.

"It's a business that's marketed ..."

"I still think there's an opportunity to run it even better when you have a profit incentive."

Critics say it will create a "huge expansion" in problem gambling.

"This third party is not going to lease that unless they know they can make a bundle of money," said the Rev. Dwayne Motley of New Yorkers for Constitutional Freedoms.

He notes the state constitution allows only the state to run lotteries, but Francis said an arrangement can be made that won't violate the constitution.

"People get addicted and they will spend all of their income, all of their resources, their assets, and it destroys families," Motley said.

"There is an extremely large number of negatives that cost money, but also there is the personal destruction of lives ... gambling and drug additions are the same -- they control you."

Francis said the administration considers the lottery a "form of entertainment," and that responsible people play the lottery without becoming problem gamblers.

If Spitzer and the Legislature proceed and find a private investor who will commit this year, New York would likely be the first state in the nation to cash in on the value of its lottery.

California, Illinois, Indiana, Texas and Florida have considered or are considering cashing in on their lottery or, more to the point, the anticipated future revenue of the lottery.

That's what a private investor would be betting on -- that it could increase lottery revenues through more or different games, more or differently allocated sites to bet, and through efficiencies.

For New Yorkers, that could mean far more lottery outlets that already are already in thousands of convenience stores and gas stations.

Community activists and antigambling groups has long criticized lotteries, saying the lottery saps the lower income players they most attract.

The next steps include hiring a finance expert -- who won't be allowed to be part of any lease.

The expert will determine the lottery's value and the best arrangements for the state.

The Legislature will decide with Spitzer whether to proceed and what the state will need from a deal.

Francis said the possibilities are infinite.

For example, the state could take a big upfront payment, take its guaranteed education revenue, then allow the operator to keep the additional revenue it generates.

Or the state could continue to retain part of any additional revenue.

Francis downplayed the option of simply borrowing against the value of the lottery.

That, he noted, increases debt and won't guarantee growth in the education revenue.

In addition, after suitors show how they would increase lottery sales, the state might decide simply to revise the program and increase profit on its own.

New York is widely seen as having one of the biggest and best run state lotteries.

Other states have so far not sought to cash in on their lotteries because of political disagreement, or opposition to short-term funding goals.

[Livyjr]

"States probe banks' role in risky loans"

By PAT EATON-ROBB, Associated Press Writer

Sat Jan 12, 5:37 PM ET

HARTFORD, Conn. - Authorities in New York and Connecticut are investigating whether Wall Street banks hid crucial information about high-risk loans bundled into securities that were sold to investors, Connecticut's Attorney General said Saturday.

The investigations, first reported Saturday by The New York Times, center around "no-doc" or "exception" loans, that did not even meet subprime standards, Attorney General Richard Blumenthal said.

"The loans were made to people who did not have any documents to verify their income or other verification for key requirements normally applied to mortgage borrowers," he said.

"Many of the lenders made large amounts of loans, so that the exception swallowed the rule, or became the rule."

The loans were sold by subprime lenders to Wall Street firms that bundled them with other, less risky, loans into securities.

Investigators want to find out whether the banks properly disclosed the high risk of default on those loans when selling those securities to investors in Connecticut and elsewhere, Blumenthal said.

"The investment banks may have used very broad, boilerplate disclaimer language that effectively failed to disclose fully and fairly all the information," he said.

Blumenthal said Connecticut is cooperating with New York and that the investigation may eventually include the Securities and Exchange Commission.

The Times said charges could be filed in the coming weeks.

Jeffrey Lerner, a spokesman for New York Attorney General Andrew Cuomo, declined to comment Saturday.

In November, Cuomo said he issued subpoenas to government-sponsored lenders Fannie Mae and Freddie Mac in his investigation into what he claims are conflicts of interest in the mortgage industry.

He said he wanted to know about billions of dollars of home loans they bought from banks, including the largest U.S. savings and loan, Washington Mutual Inc., and how appraisals were handled.

Spokesmen for both lenders said they require accurate appraisals and both agreed to appoint independent examiners as requested.

Washington Mutual said it was conducting its own internal investigation into Cuomo's claims and that "the company will vigorously defend itself from all unfounded allegations and lawsuits."

Blumenthal declined to say which firms were under investigation, but said his office had issued over 30 subpoenas.

"These practices involving trillions of dollars in securities sold to ordinary investors go to the core of our financial system's integrity and efficiency," Blumenthal said.

"We regard this investigation as a priority."
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Associated Press writer Michael Virtanen in Albany, N.Y., contributed to this report.

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"NY seeks to steer patients from ERs to family doctors"

By VALERIE BAUMAN, Associated Press

Last updated: 3:03 p.m., Sunday, January 13, 2008

ALBANY -- Instead of waiting for hours in an emergency room or landing in a nursing home, New Yorkers with government health coverage will soon have opportunity to avoid those costly treatment venues by going to their own family doctor.

In his State of the State address Wednesday, Gov. Eliot Spitzer proposed changing the way New York reimburses hospitals and doctors for services -- part of overall changes aimed at making health care cheaper for taxpayers and better for patients.

The current system for reimbursing doctors in the pay-per-visit Medicaid and Family Health Plus programs hasn't been updated since 1981, said Dr. Richard Daines, the state health commissioner.

When primary care doctors are paid a fee that reflects the service they deliver, patients will have more options, he said.

While managed care programs tend to pay doctors about what private insurers pay, a doctor treating a Medicaid patient under the pay-per-visit system receives $67.50 per visit, whether it's an expensive, complex treatment process or a simple booster shot, Daines said.

"If we are able to pay higher rates to primary care doctors, it will be easier to find a family doctor," Daines said.

Patient advocates like the proposal.

"The most serious and most expensive health care problems that New Yorkers face -- asthma, diabetes, HIV/AIDS, hypertension, stroke -- these are things that can be treated and sometimes prevented if you've got strong, community based primary and preventive care," said Michael Kink, legislative council for Housing Works, an organization serving low income people and people with HIV/AIDS.

"We shouldn't be waiting until people get really sick and incur really kind of high cost, high complexity illnesses."

"If you've got a Medicaid card in your pocket, you're going to see more primary care doctors in your neighborhood," Kink said.

"You may see doctors sooner."

It's unclear what types of procedures and visits will start to reimburse doctors at a lower rate.

Health officials said they won't know until the state budget comes out later this month.

Hospitals and health care providers tend to have very small profit margins, and changes in reimbursements raise concerns that if primary care physicians are paid more, other specialties could be paid less, said William Van Slyke, spokesman for the Healthcare Association of New York State.

"Any reduction, period, in health care reimbursement increases the challenge of providing community care," Van Slyke said.

Hospitals support providing preventive and outpatient care but are apprehensive about the transition.

"It's a necessary shift to a new way of the government funding of the health care," Van Slyke said.

"Our concern is that we have to get to this new system first before we pull the rug out from under the old one ..."

"What we need is time to transition and financial support to keep the existing system viable while we move to the more outpatient based system."

Officials at the state health department said data suggests some providers may not be thrilled with the changes, but most would find a balance between procedures paying more and those paying less.

"A year ago I was one of those hospital executives waiting to hear what the budget would do, so I've been on that end of it," Daines said.

"So it's a perspective that I've brought that there are rates of change that can be tolerated and there are bottom line issues."

"We're sensitive to those."

Chandler Ralph, CEO of Adirondack Medical Center, said she supports increasing the reimbursement rate for primary care physicians, but believes no payment should ever be less than the actual costs of the care.

"You have to be sure the reimbursement system is fair to every physician," she said.

"I have physicians who are asking me to pay (them) to be on call in the emergency room."

"One of the key factors of that is when they get called in, in the middle of the night, to either a patient with no insurance or a patient with low reimbursement, that's no longer sustainable."

If the reimbursements cut down on total income, the center will probably have to cut back on community services, Ralph said.

That could eliminate diabetes classes, wellness classes at businesses and exercise classes for the elderly.

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On the Net:

Health Department: http://www.health.state.ny.us

Healthcare Association of New York State: http://www.hanys.org/

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"Some spending halted in Colonie - 'Nonessential' items won't be purchased while deficit solutions studied"

By JORDAN CARLEO-EVANGELIST, Staff writer, Albany, New York Times Union

First published: Sunday, January 13, 2008

COLONIE -- Supervisor Paula Mahan has halted all "nonessential" spending in town while her administration continues to evaluate the multimillion-dollar deficit it inherited when she took office earlier this month.

Road salt, asphalt and other materials necessary to maintain services and public safety will not be affected, but items such as work-related trips, conferences and some equipment upgrades will be frozen until at least April, Mahan, a Democrat, said Saturday.

"There are certain things that we have to have, that we cannot do without," Mahan said, calling the situation "quite serious."

She said "anything in the departments that is not necessary to the daily functioning of the town" may have to wait.

The freeze, announced to town department heads late this week via e-mail, is one of several efforts Mahan said she and newly appointed Comptroller Craig Blair hope will cut costs while they assess the town's financial condition.

While town officials said they don't yet have a short-term savings goal, the town's former money manager said nonessential expenses were already "pretty much bare bones."

A Moody's Investors Service report last year said the town's general fund deficit had grown to $8.5 million.

Mahan said it may now be larger.

The 2008 town budget is $83 million.

The report also said the town appeared to have no practical plan to improve its credit rating, which Moody's put just below Albany's and a shade better than Schenectady's -- a bitter pill for a suburban town with a huge tax base and a reputation built on prosperity.

In addition to curbing spending, Mahan said she has restructured parts of the work force, not filling one full-time attorney's job or the management job at the town golf course vacated by Blair.

"We're raising the bar for the people that we have (appointed)," Mahan said.

That was one of the reasons Mahan used to defend the salary of newly appointed Town Attorney Michael Magguilli.

Republican Town Board members earlier this month questioned the wisdom of hiring Magguilli at $105,500, the top of the pay scale, when for years the town hired between the bottom and the middle.

But Mahan said Magguilli's office will be taking on responsibilities once performed by outside lawyers, thus saving money.

Officials also are reviewing the town's numerous contracts with other outside agencies for services, like one for $15,000 related to Colonie's Web site.

Mahan and her three fellow Democrats who won seats on the Town Board in a historic upset in November used the Moody's report as foundation of their campaign -- though officials from Republican Supervisor Mary Brizzell's administration said they believed the report was misleading.

Former town Comptroller Ronald Caponera, who left with Brizzell's administration, said Saturday that for some time his office had reviewed requisition orders of more than $200.

"It's not where the big bucks are," Caponera said, adding that salaries and benefits are a much larger expense.

They are also more difficult to revamp because much of the town work force is unionized.

Another union for 200 more employees, including department heads, is being formed.

In recent years, town cars have been taken away from some department heads.

Mahan said she will re-evaluate the freeze in April.

By then, the town expects to have heard from the state comptroller's office on a routine audit of its finances conducted in the last year.

The results of that audit could come as soon as the next several weeks.

Eventually, Mahan said she plans to meet with residents and explain the town's financial situation to them.

"I believe they deserve the truth, and they're going to have that opportunity to hear the truth," the supervisor said.

"It's a hard thing to have to tell people that we're in such tough shape."

Jordan Carleo-Evangelist can be reached at 454-5445 or by e-mail at jcarleo-evangelist@ timesunion.com.

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"Challenges of 2008 exacerbated by chill at Capitol - Toxic relationships among New York's leaders bode ill for issues from the budget to the economy"

By RICK KARLIN, Capitol bureau, Albany, New York Times Union

First published: Monday, January 14, 2008

ALBANY -- For anyone wondering how this year's legislative session is likely to proceed, consider this long-distance exchange between Republican Senate Majority Leader Joseph L. Bruno and Democratic Assembly Speaker Sheldon Silver:

Bruno early last month said Silver was a "wimp" for not standing up to Gov. Eliot Spitzer.

Silver retorted that Bruno was full of "baloney," and noted the senator was still under FBI investigation.

The atmosphere at the Capitol, often described as toxic last year, has hardly cleared as the Legislature heads into the 2008 session.

During a Christmas luncheon Bruno held for the media last month, he said he believes the governor has created "a continuous declaration of war heading into the (legislative) session."

The ongoing travel-records scandal, in which Spitzer aides ordered up information from State Police on Bruno's use of state aircraft and his travels to New York City, is another point of conflict, with Republican senators continuing to accuse Spitzer of conducting dirty tricks against the majority leader.

With ongoing investigations by Albany County District Attorney David Soares and the state Public Integrity Commission, the issue isn't likely to die anytime soon.

As if that tumult isn't enough, all 212 lawmakers are up for re-election in November, and Spitzer has shown a determination to help Democrats seize control of the Senate.

And with the possibility of a presidential contest featuring one or even two New Yorkers, Sen. Hillary Rodham Clinton and Rudy Giuliani, sparking what could be an unusually high turnout next November, there's a potential for plenty of posturing.

And on Wednesday, as Spitzer outlined his vision for the year in his State of the State address, Republicans were openly subdued, offering tepid applause or none at all.

Against that backdrop, Spitzer and the Legislature will confront an estimated $4.3 billion budget gap and the prospect of a slowing economy.

And don't forget ever-rising gas prices, which are likely to prompt a variety of bills and proposals ranging from cutting fuel taxes to boosting ethanol and mass transit.

With that in mind, here's a readers' guide to some of the major issues that Spitzer, Silver, Bruno, et al., will be grappling with in the coming months:

The issue: Property taxes

Background: No secret here, New York leads the nation when it comes to how much homeowners pay.

It's been a perennial issue, but there's new pressure this year.

Senate Republicans have made it clear that property tax relief is their top priority, wanting by 2009 to triple the school tax rebates people currently get.

Spitzer on the other hand has appointed a commission to look at capping school property taxes rather than more rebates.

Prognosis: A cap that would limit the levy, or amount that can be generated from a given community, is already in place in Massachusetts.

A similar cap was just passed in New Jersey, as well.

While it's unclear how the Democratic Assembly would stand on the issue, there will likely be a lot of debate.

The toughest part may be containing the costs that drive those taxes, which could mean confronting the powerful teachers union.

And if the state looks to make up the money school districts forgo by holding the line on property taxes, there could be pressure to raise state taxes, which leaders are loath to do.

The issue: Upstate economy and capital plan

Background: Spitzer raised the issue in his campaign, describing upstate as Appalachia.

Aside from the Capital Region, much of that vast region is living up to that reputation for dim job prospects and population loss.

Spitzer wants a $1 billion upstate revitalization fund to help turn that around.

Prognosis: Spitzer and the Senate will likely continue to wrangle over where capital spending goes.

Senators will all want pieces of this pie for their districts, while Spitzer will likely accuse them of pork barrel spending.

But eventually, some amount of money will likely be allocated.

The issue: Revitalizing SUNY

Background: Last year, Spitzer added some $1.7 billion to the K-12 system and also set up a framework in which spending increases are targeted to needy or underperforming school districts.

The plan is designed to ensure money goes to improving classroom results.

Now, the governor wants to upgrade the state and New York City university systems, hiring more professors and, as per recommendations of a Spitzer-appointed panel, giving various SUNY campuses flexibility on tuition, which is now locked in statewide at $4,350 for the state-run SUNY campuses and $4,000 at CUNY.

The governor also wants to create an endowment for the system.

Prognosis: No one opposes boosting spending at SUNY and CUNY, but the Democratic Assembly has already signaled its opposition to variable tuition, with members complaining that it could create class distinctions.

The issue: Pay raises for lawmakers, judges, statewide elected officials and commissioners

Background: They've had no raise since 1999 (although many lawmakers get more than the $79,500 base pay for additional duties, such as committee chairmanships).

Judges are grousing about their stagnant pay ($136,700 in the trial courts, higher in some other venues).

Much of the pressure for the increase for lawmakers has come from New York City, where costs are higher and City Council members earn $112,500.

Spitzer has suggested he'd grant raises in return for campaign finance reform.

Bruno struck a deal last year, but it fell apart.

Lawmakers tend to believe that hiking pay for judges will give them some cover so they don't look greedy.

Prognosis: Don't bet on pay raises this year, at least not without lawmakers giving the governor some big concessions.

For one thing, this is an election year, a time when legislators are cautious about hiking their pay (technically, a Legislature can't raise its own pay; raises would take effect in 2009. But most incumbents who run get re-elected in New York).

If there is a trade-off, it could come with Silver agreeing to a property tax cap and both the Assembly and Senate conceding to some type of campaign finance reform.

The issue: State horse racing franchise

Background: The New York Racing Association's franchise to run Aqueduct, Belmont and Saratoga expired last year.

State leaders worked out a short-term deal to let NYRA keep running the tracks, but a long-term arrangement isn't yet in place.

Spitzer, Bruno and Silver have yet to reach an agreement.

Bruno wants bigger changes at NYRA, while Silver resists the idea of a video lottery machine casino at Belmont.

Prognosis: The leaders will probably reach an agreement that involves some changes at NYRA and a separate franchise for an operator of a large video slot operation at Aqueduct.

The issue: Health care

Background: Spitzer is looking to fundamentally shift the emphasis in New York's system of health care from costly hospital-based treatment to prevention.

He plans to make changes in the Medicaid system in an effort to influence the private sector as well, with higher reimbursements for preventive and less-costly care, such as regular checkups and clinic treatment.

There is also talk of trying to create a system of universal health coverage in the state.

Prognosis: So far, it doesn't appear that the governor will get major resistance to the Medicaid idea, as leaders from both parties agree that something needs to be done about health care costs.

A universal health care system, however, would be a more complex discussion, particularly when it comes to whether the state would mandate coverage for all New Yorkers, whether they want to pay for it or not.

The issue: Immigration

Background: Last year, Spitzer touched off a firestorm with a proposal to let illegal immigrants obtain driver's licenses.

In the face of unrelenting opposition from Republicans and pundits, and dissension among Democrats, he backed off.

But Republicans got a taste of how hot the issue can be in New York.

Prognosis: While Spitzer isn't likely to resurrect his plan, Republicans in an election year could put forward some immigration-related proposals just to remind people of the Democratic governor's mistake last year.

[Livyjr]

"DiNapoli Releases Debt Study, Urges New Cap on State Debt - 31 Percent Hike in Debt Over Five Years Highlights Need for Reform"

New York State Comptroller Thomas P. DiNapoli today urged State lawmakers to enact a new debt cap following the release of the 2007 Debt Impact Study, which indicates that State-funded debt grew to nearly $51 billion in the last fiscal year from $39 billion in the 2002-03 State Fiscal Year, a 31 percent increase that raises concerns about the sustainability of New York’s borrowing practices.

“The State’s increasing debt burden is a real concern,” DiNapoli said.

“Debt is not a cost-free option."

"Every dollar we spend on paying off debt is another dollar that can’t be used for other public needs and services."

"The debt cap in the Debt Reform Act of 2000 simply wasn’t real."

"We need a meaningful cap that includes all State-funded debt and sets parameters based on how much the State can afford.”

The Debt Reform Act of 2000, which limited State-supported debt to 4 percent of personal income, has not effectively controlled the growth of State funded debt.

The Act used a narrow definition of State-supported debt and does not apply to roughly $33 billion of about $51 billion of State-funded debt outstanding as of March 31, 2007.

When all State funded debt is counted, current outstanding debt is 6.45 percent of personal income, more than 50 percent higher than the cap.

DiNapoli’s report found that State-funded debt outstanding had grown more than 31 percent between April 2002 and March 2007.

The report also shows that annual State-funded debt service is projected to rise from $4.6 billion in the current fiscal year to nearly $7.1 billion by SFY 2012, an average annual growth of nearly 9 percent.

DiNapoli’s debt reform proposal would place all new and existing outstanding State-funded debt under the cap, and limit State-funded debt to 5 percent of personal income.

DiNapoli’s cap would be phased in over a 9-year period.

DiNapoli is also proposing to prohibit debt for any purpose other than capital projects.

DiNapoli’s report also found that since the passage of the Debt Reform Act of 2000, $7.6 billion in new debt has been issued for deficits or budget relief; this debt was excluded from the provisions in the Act prohibiting borrowing for non-capital purposes.

Roughly $11.5 billion, or about 22.5 percent, of all State-funded debt outstanding as of March 31, 2007, was used to cover operating deficits or budget relief.

Fifty-five percent of the growth in State-funded debt outstanding between SFY 2002-03 and SFY 2006-07 was issued for the non-capital purposes.

DiNapoli’s Debt Impact Study also found:

State-funded debt as a percentage of personal income increased to 6.5 percent in SFY 2006-07 from 5.7 percent in SFY 2002-03;

The State’s reliance on debt rather than current resources to support capital projects has increased over time.

Despite various levels of budgetary surplus, New York has used cash for just 33.8 percent of its non-federal capital spending over the past decade.

The current five-year capital plan projects pay as you go non-federal capital spending to average only 26.2 percent over the five-year plan period;

Voter-approved General Obligation debt accounts for $3.3 billion of all State-funded outstanding debt or only 6.5 percent, significantly limiting the public role in determining the overall level of borrowing; and,

The per capita State-funded debt burden has reached $2,641 by the end of SFY 2006-07 and is forecast to grow to $3,263 by SFY 2011-12, an increase of 23.6 percent.

###

Albany Phone: (518) 474-4015 Fax: (518) 473-8940

NYC Phone: (212) 681-4840 Fax: (212) 681-7677

Internet: www.osc.state.ny.us

E-Mail: press@osc.state.ny.us

http://www.osc.state.ny.us/press/releases/jan08/011108.htm

[Livyjr]

"Auditor: Company steered state-funded contracts through fake bids"

Associated Press

Last updated: 2:53 p.m., Monday, January 14, 2008

ALBANY -- An upstate agency that serves the developmentally disabled submitted as many as 60 fictitious bids to direct state preservation funds to specific vendors, state Comptroller Thomas DiNapoli said Monday.

The fictitious bids were uncovered during an unannounced audit of Springbrook NY Inc., a not-for-profit company based in Oneonta that serves 550 people with developmental disabilities.

"Submitting false bids is not only against the law, it also undermines public confidence in the use of state funds," DiNapoli said.

"Springbrook management had a responsibility to ensure that its internal controls were working as intended."

"The lack of oversight opened the door for this fraud."

The audit findings were turned over to the Broome County District Attorney's Office, DiNapoli said.

The state provides preservation funds to assist agencies with the maintenance and upkeep of their structures, including such work as renovating kitchens and bathrooms and replacing boilers, furnaces and water heaters.

Between July 2003 and June 2007, Springbrook received funding totaling $512,513 for 67 such projects at its 19 community homes through the Broome Developmental Disabilities Services Office.

After reviewing the projects, auditors found 60 fictitious bids related to 36 projects involving $235,705.

DiNapoli said it appeared 25 of the fake bids appeared to have been created by either Springbrook's facilities manager at that time or a member of his staff using vendor bid templates that auditors found on Springbrook computers.

DiNapoli said it appeared the former facilities manager or his staff member may have created the remaining 35 fictitious bids as well.

Although it appeared the contracted work was completed, Springbrook officials cannot be sure that they received the best price for the work because the projects were not competitively bid.

Springbrook's chief financial officer failed to periodically review the work of the former facilities manager, who had complete control over the bidding process and was able to create fictitious bids without detection.

The former manager was not identified.

Auditors also discovered that the chief financial officer became aware of the potential improprieties shortly after the termination of the manager, but did not try to determine the extent of the improprieties and did not advise higher-level Springbrook officials of the situation.

The audit recommended that Springbrook develop and implement adequate internal controls regarding the selection of vendors for Preservation Fund projects.

Springbrook officials agreed with the audit's findings and recommendations, and have already taken actions to implement them.

The audit found no bidding infractions before the hiring of the former manager or subsequent to his termination.

------

On the Net:

http://www.osc.state.ny.us/audits/allaudits/093008/07s51.pdf.

[Livyjr]

THE ROCHESTER DEMOCRAT & CHRONICLE

"Spitzer must clarify how upstate will get aid"

(January 14, 2008) — In his upcoming State of Upstate speech, it's imperative that Gov. Spitzer be a lot clearer about his proposed $1 billion economic development fund for upstate than he was during a recent Editorial Board meeting.

Questioned last week whether the proposed fund involved borrowing, Spitzer insisted the bulk of the $1 billion would be generated by selling capital assets such as state-owned buildings in Manhattan.

Hours later, however, a top aide advised the Editorial Board that Spitzer had misspoken when he insisted the state's debt load wouldn't increase "in any significant way."

The aide said as much as $700 million would be borrowed to help fund projects such as the demolition of Rochester's Midtown Plaza.

That's hardly insignificant.

True, Spitzer has lots on his mind lately as he seeks to rebound from political missteps.

But the fund is the cornerstone of his strategy to revitalize the upstate economy.

It's reasonable to expect him to know how it operates — the ins and outs.

Spitzer now must use his speech, scheduled for Wednesday, to clarify the extent to which his proposed fund will depend on borrowing.

Moreover, he must reassure New Yorkers that the fund makes the most sense.

After all, the state is already in so much debt that just last week, state Comptroller Thomas DiNapoli urged the state Legislature to put a new ceiling on state debt.

In the past fiscal year alone, state-funded debt grew to nearly $51 billion from $39 billion in the 2002-2003 fiscal year.

Spitzer, who vowed to change state government on "Day One" of his new administration, is right to give special attention to upstate, as a fiscally wobbly New York City received 30-plus years ago.

But he must be smart about it.

Spending more money — considerably more, as he did in last year's state budget, which increased 7 percent, and borrowing more as he's proposing this time around — isn't smart.

Clear-thinking New Yorkers didn't expect Spitzer to put the state on a new path without dramatic policy shifts.

He can make tough calls on spending and borrowing, as well as help revitalize upstate at the same time.

He must.

http://democratandchronicle.com/apps/pbcs....13/1041/OPINION

[Livyjr]

NEWSDAY

"Gov. Spitzer risks dividing state against itself"

BY MATTHEW CROSSON | Matthew Crosson is president of the Long Island Association, the largest business organization in New York State.

January 14, 2008

On Wednesday, Gov. Eliot Spitzer will deliver the first State of Upstate address, in Buffalo.

The speech is a well-intended attempt to encourage the people upstate as they try to rebuild their faltering economy.

Last week, in his State of the State speech, Spitzer announced a $1-billion upstate revitalization program, a concrete commitment of cash to that rebuilding effort.

There's no doubt that upstate New York needs economic help from Albany.

But there's also no doubt that downstate areas, including Long Island, need that help, too.

Spitzer risks widening the economic and political divide that has long separated upstate and downstate with what now appears to be an imbalanced, two-state approach to economic development.

At first glance, the economic divide between upstate and downstate seems profound.

More than 5,000 vacant homes are now being bulldozed in Buffalo, with another 5,000 soon to follow - 10,000 vacant homes being ground to dust.

Here on Long Island, young people are fleeing because they can't find an affordable place to live.

Could there be a starker contrast?

But the real comparison between economic conditions on Long Island and in upstate New York is more complex and surprising.

Long Island, despite having a gross product that almost equals all upstate metropolitan areas' combined, faces its own impending economic problems.

And it faces them largely without state help.

New York needs a real one-state economic development strategy.

We need a plan that responds to the true economic conditions of each region, in balance with that region's economic output.

We need a plan that integrates upstate and downstate economic development.

We need to promote understanding among upstaters and downstaters of the economic facts that affect us all.

And we all need to understand that we are in the same economic boat, and it's not just the upstate part of the boat that's leaking.

Unfortunately, when Spitzer took office, he divided the Empire State Development Corp. into two parts, because of a campaign promise.

But the divided structure risks promoting political competition for scarce resources.

Instead of inspiring a one-state economic approach, it risks ensuring continued division.

Now, by committing $1 billion exclusively to revitalize upstate New York, and by singling out that area for an unprecedented address focused on solving only its problems, the governor is literally placing a price tag on the upstate-downstate competition - and signaling which region he favors to win.

He's making it fair game for downstate advocates, like me, and our legislative delegations to make our case for that money and to compete in the State Legislature to get it.

Making Long Island's case is not difficult.

For example, according to the Federal Reserve Bank of New York, in 2007 private-sector employment upstate grew at just a 0.5 percent rate.

Long Island's rate of private-sector employment growth through November was also 0.5 percent.

During the 1990s, upstate New York lost 20 percent of its younger residents - exactly the same percentage who moved away from Long Island.

So far in this decade, Long Island's 25- to 44-year-old population has declined by 14.8 percent, compared with 9.4 percent upstate.

In fact, since 2000, Long Island has been losing young residents at a greater rate than any other region in the state, or the nation as a whole.

Long Islanders pay 20 percent more of their household income for property taxes than all other New Yorkers as a group, and the gap is wider when compared to upstate taxpayers alone.

Because of the higher taxes and housing costs, Long Islanders have negative median disposable income; all upstate residents enjoy significantly positive disposable income, even though their average household income is somewhat lower.

Yet Long Island's taxpayers still effectively help subsidize state economic support for upstate New York.

According to the Rochester-based Center for Government Research, as of 2001, that subsidy was $2.7 billion a year.

Now it's certainly much higher.

That's a compelling case for Long Island to share in that $1 billion of state aid, but a case it would be better not to have to make.

A state divided against itself cannot prosper.

Spitzer needs to return balance to New York's economic development investments.

http://www.newsday.com/news/opinion/ny-opc...0,7779182.story

[Livyjr]

THE NEW YORK DAILT NEWS DAILY POLUITICS BLOG:

This Spitzer dude sure does have a JONES to MOVE a lot of money from somewhere through the NYS economy ....

And nobody ever questions where exactly that money is going to come from, which is to say, where is that money sitting right now, waiting for the PROFLIGATE Spitzer to "borrow" it?

Here we are, supposedly in the midst of a HUGE CREDIT CRUNCH in America ...

And yet, "STEAMBOAT" Spitzer seems to have a BILLION DOLLARS or more, waiting at his fingertips to be BORROWED ...

Which is to say, be MOVED ....

IS THE STATE OF NEW YORK A WASHING MACHINE, I wonder ...

IS OUR STATE TREASURY A LAUNDRY?

Dirty money in ....

Clean money back out ....

No questions will ever be asked ...

No answers will ever be given ...

AND WE, THE FOOLS WHO COMPRISE THE CITIZEN BODY OF THIS STATE, WILL PAY NOT ONLY THE FREIGHT FOR "BORROWING" THIS MONEY ...

The lawyer's fees ...

We will also pay interest on it, as well ...

According to Comptroller Tom DiNapoli's recent report ....

The PER CAPITA (EACH ONE OF US, MAN, WOMAN, CHILD) State-funded debt burden in New York has reached $2,641 by the end of SFY 2006-07 and is forecast to grow to $3,263 by SFY 2011-12, an increase of 23.6 percent ....

Sooooo .....

On top of what we already owe for everything else we might owe for in OUR OWN LIVES, we also owe, right now, each of us, including your children and grandchildren, another $2,641 to pay for what THE THUG (NYS) borrows to keep its politicans and special interests fat as hogs and twice as hungry ....

But, hey, folks ....

We''re in the midst of the BUSH BOOM ....

We're all rolling in dough, thanks to the ECO-NOMIC polices of the HAVARD-trained financial wizard George W. Bush ...

So what is another couple of GRAND coming out of our pockets to pay for Eliot Spitzer's FISCAL PROFLIGACY?

And so ....

Posted by John Galt on January 15, 2008 8:21 AM

http://www.nydailynews.com/blogs/dailypoli...2.html#comments

[Livyjr]

"Spitzer rakes in campaign contributions nationwide through scandal back home"

By MICHAEL GORMLEY, Associated Press

Last updated: 6:33 p.m., Wednesday, January 16, 2008

ALBANY -- State records show Gov. Eliot Spitzer collected nearly $3 million in campaign contributions during the last half of 2007 despite a scandal that made his popularity plummet in New York.

About $50,000 came from California including from $5,000 from Abigail E. Disney of the Walt Disney family; and from prominent New Yorkers including actor Edward Norton ($10,000), model Christie Brinkley ($500), and Ivanka M. Trump, daughter of developer and TV star Donald Trump, ($1,000).

More than $100,000 more came from Texas fundraisers and thousands more came from lobbyists and law firms in New York state.

The state campaign finance records reflect donations from July 2007 to early this month.

Much of that time Spitzer was dogged in Albany by a scandal in which top aides were accused of a plot against Republican Sen. Joseph Bruno.

In the fall, Spitzer was regularly criticized by CNN's Lou Dobbs over the governor's proposal to make it easier for illegal immigrants to get driver's licenses.

Spitzer eventually withdrew the proposal, but his historic popularity that swept him into office in 2006 took a big hit as his approval rating dropped to under 40 percent by the end of 2007.

"The governor has always had deep support among Democratic activists nationwide," said Jonathan Rosen, spokesman for the Spitzer 2010 campaign.

"He's always been a strong voice on national progressive issues."

Spitzer attended Texas fundraisers on Oct. 3-4 in Houston and Dallas.

He had a fundraiser scheduled in California on Oct. 23, but canceled because the Senate had called for a special session of the Legislature.

Some of the Californians -- a frequent source of campaign funds for politicians with national stature -- sent their checks anyway.

In his 2006 campaign for governor, Spitzer attracted donations from Hollywood moguls Steven Spielberg ($5,000) and Jeffrey Katzenberg ($25,000), and smaller donations from singers Barbara Streisand and Don Henley of The Eagles, as well as actor Ben Affleck.

Among his expenses in the last half of 2007 was $129,000 in tickets for having his campaign signs up in violation of a New York City ordinance, a measure that also snared Mayor Michael Bloomberg.

Spitzer's New York donors include the Wilmot family of Pittsford, near Rochester, which is a major developer in New York.

Through several family members, more than $20,000 was donated to Spitzer's campaign on Dec. 6.

Stephen Berger of New York City donated $10,000.

Berger headed a state commission appointed by former Gov. George Pataki known as the Berger Commissioner to recommend the closing of underused hospitals as way to cut runaway costs in the Medicaid program.

Spitzer had all $2.9 million collected from July to Jan. 11 on hand when he filed the required report this week.

He returned some contributions that violated his own rules which limit individual contributions to less than a fifth of that allowed by law.

He had almost $1.5 million more on hand this month than he did in July.

Last year, Spitzer used some campaign funds for television commercials that pushed some of his measures to cut health care spending and to counter a million-dollar TV campaign by a healthcare workers' union.

----

On the Net:

http://www.elections.state.ny.us

[Livyjr]

"Supreme Court upholds New York's system of choosing trial judges"

Associated Press

Last updated: 10:22 a.m., Wednesday, January 16, 2008

WASHINGTON -- The Supreme Court unanimously upheld New York's unique system of choosing trial judges Wednesday, setting aside critics' concerns that political party bosses control the system.

"A political party has a First Amendment right to limit its membership as it wishes and to choose a candidate-selection process that will in its view produce the nominee who best represents its political platform," Justice Antonin Scalia wrote for the court.

In New York, primary voters elect convention delegates who choose candidates for the judgeships.

Once nominated, those candidates run on the general election ballot.

In practice, they frequently have no opposition.

Unsuccessful candidates for judgeships and a watchdog group filed a lawsuit challenging the system.

A federal district judge and the 2nd U.S. Circuit Court of Appeals agreed that it is very difficult for candidates to get on the ballot if they don't have support of the party leaders.

In striking down the system, the two federal courts said judgeship candidates who are not the choice of the party leaders are excluded from elections by an onerous process that violates their First Amendment rights.

Critics have said the conventions are patronage-driven affairs in which allies of party leaders are rewarded with judgeships and all others are shut out.

The 2nd U.S. Circuit Court of Appeals said that between 1990 and 2002, almost half the state's elections for Supreme Court justice -- trial judges in New York's judiciary -- were uncontested, calling them "little more than ceremony."

The appeals court ordered the state to dispense with the conventions and switch to primary elections until state lawmakers come up with a new plan.

Many legal and civics groups have come out in favor of appointing judges in New York.

The high court on Wednesday reversed the lower courts.

[Livyjr]

"New York commission urges regulation of financial services to follow 'principles'"

By DAN SEYMOUR, Associated Press

Last updated: 5:53 p.m., Friday, January 18, 2008

NEW YORK -- A commission helping redraft the regulatory framework for New York's finance industry is considering placing greater emphasis on "principles" than on strictly defined rules, Gov. Eliot Spitzer said Friday.

Regulations based on broad guidelines -- such as "observe proper standards of market conduct," and "maintain adequate financial resources" -- could inject some flexibility into the arcane and Byzantine rules governing the industry now, Spitzer said.

While the governor said the move to revamp the state's regulatory system began long before last year's mortgage crisis reached a boiling point, he said the turmoil in financial markets underscores the need to modernize the system.

"There is also a premium to restoring the credibility to a regulatory framework that I think a lot of people look at and say, 'You have failed,'" he said.

Spitzer established the commission by executive order in May to issue recommendations to the state for regulatory change, aiming for regulations that can keep markets running smoothly and protect investors and consumers.

Composed of more than 40 members including bank executives, lawyers, regulators and consumer advocates, the Commission to Modernize the Regulation of Financial Services held its first meeting Friday at New York University.

A principle-based regulatory framework would more closely resemble that used in London.

Spitzer said such a system would serve as a foundation for interpreting existing laws, and urge regulators to concentrate on outcomes instead of the process.

Much of the regulatory structure overseeing the industry in New York today is a holdover from an era in which walls separated different types of finance companies, such as commercial banks, investment banks and insurers.

After those walls were broken down, the "silos" that sprouted to oversee each type of industry remained.

As a result, many companies are regulated by a number of different bodies, and sometimes different companies selling the same product are bound by different sets of rules.

Spitzer declined to discuss any timetable for the implementation of changes.

The commission's members include the chief executives of investments banks Goldman Sachs, Morgan Stanley and Merrill Lynch; insurers MetLife and AIG; and the New York Stock Exchange and the Nasdaq.

[Livyjr]

THE NEW YORKER

"Profiles - The Humbling of Eliot Spitzer - The Governor’s rocky rookie season."

by Nick Paumgarten

December 10, 2007

Spitzer’s tenure as a state attorney general may be the most heavily chronicled of any in America’s history.

He reimagined the office, inserting it into the void left by a general regulatory retreat by the federal government.

He regarded his activism as a logical and just extension of a new states’-rights movement, which had been conceived as an attempt to roll back oversight and advance a conservative, laissez-faire agenda, but which Spitzer interpreted as an invitation to state-led intercession and prosecutorially mandated policy change.

With great gusto, he went after big polluters, pharmaceutical companies, gun manufacturers, and, most notably, the financial industry, where various harmful and fraudulent practices had taken root—insincere equity research, shady market timing, bid rigging.

As many saw it, Spitzer’s modus operandi was to build a case against his targets, then push the most egregious allegations in the media, which put unbearable public pressure on the targets to settle.

And settle they almost invariably did.

Spitzer earned an impressive array of scalps, admirers, headlines, and plaudits for reform, as well as a coterie of powerful enemies, whose indignation toward his media manipulations, disproportionate tactics, and occasionally shallow understanding of their businesses tended to be drowned out by the widespread public disgust engendered by their greed.

His detractors tend to complain that the press created Eliot Spitzer—that the Sheriff of Wall Street, to use one moniker, was a fantasy of the liberal, wealth-resenting media.

"New York commission urges regulation of financial services to follow 'principles'"

By DAN SEYMOUR, Associated Press

Last updated: 5:53 p.m., Friday, January 18, 2008

NEW YORK -- A commission helping redraft the regulatory framework for New York's finance industry is considering placing greater emphasis on "principles" than on strictly defined rules, Gov. Eliot Spitzer said Friday.

Regulations based on broad guidelines -- such as "observe proper standards of market conduct," and "maintain adequate financial resources" -- could inject some flexibility into the arcane and Byzantine rules governing the industry now, Spitzer said.

While the governor said the move to revamp the state's regulatory system began long before last year's mortgage crisis reached a boiling point, he said the turmoil in financial markets underscores the need to modernize the system.

"There is also a premium to restoring the credibility to a regulatory framework that I think a lot of people look at and say, 'You have failed,'" he said.

Spitzer established the commission by executive order in May to issue recommendations to the state for regulatory change, aiming for regulations that can keep markets running smoothly and protect investors and consumers.

EXECUTIVE ORDER

No15: ESTABLISHING THE NEW YORK STATE COMMISSION TO MODERNIZE THE REGULATION OF FINANCIAL SERVICES

WHEREAS, New York is the financial capital of the world, home to a thriving financial services market that serves as an engine for the state economy; and

WHEREAS, the financial services sector generates by far the largest revenues of any other market sector in New York, and employs hundreds of thousands of employees throughout the state; and

WHEREAS, cutting edge technologies, creative solutions and innovative strategies are essential for financial services companies to successfully compete in the marketplace; and

WHEREAS, various financial services companies have alleged that unnecessary, burdensome and inconsistent regulation by multiple state regulators has stunted creativity and growth in many aspects of the financial services sector in New York, resulting in higher business costs and lost opportunities; and

WHEREAS, various consumer advocacy groups have alleged that New York’s regulation of financial services companies is outdated and does not adequately protect consumers; and

WHEREAS, New York’s economic outlook depends in large part on whether it can attract and retain financial services companies and remain the financial capital of the world; and

WHEREAS, global competition to attract and retain financial services companies has never been greater; and

WHEREAS, in order to remain the global leader in the sector, New York must adopt world class financial services regulations that protect consumers, and promote growth and creativity in the industry; and

WHEREAS, a comprehensive review of New York’s financial regulations is necessary to provide the state with critical information essential to improve financial regulation in the state;

NOW, THEREFORE, I, Eliot Spitzer, Governor of the State of New York, by virtue of the authority vested in me by the Constitution and the Laws of the State of New York do hereby order as follows:

1. There is hereby established the New York State Commission to Modernize the Regulation of Financial Services (“Commission”).

2. The Commission shall consist of at least 15 members appointed by the Governor, including:

(a) the Superintendent of Insurance, the Superintendent of Banks, the Secretary of State, the Chairperson of the Consumer Protection Board, and the Attorney General;

(b) the Chairs of the Senate and Assembly Insurance and Banking Committees; and

© at least six additional members appointed by the Governor, including representatives of the insurance, banking and securities industries, other business leaders and consumer groups.

The Superintendent of Insurance shall serve as the Chair of the Commission.

3. A majority of the members of the Commission shall constitute a quorum, and all recommendations of the Commission shall require approval of a majority of the total members of the Commission.

4. The Commission shall conduct a comprehensive review of New York’s financial services statutes, regulations, rules and policies.

The Commission is charged with:

(a) identifying ways in which regulatory powers may be integrated, rationalized, and changed in order to promote economic innovation and protect consumers;

(b) recommending specific changes in statutes and regulations that promote competition and the growth of business, while effectively protecting both consumers and businesses from unfair or unethical practices; and

© ensuring that all statutes and regulations serve a beneficial purpose and do not impose costs higher than any benefits they provide.

5. In undertaking its review, the Commission may request documents, conduct public hearings, hear the testimony of witnesses, and take any other actions it deems necessary to carry out its functions.

6. The Commission shall issue such interim reports of its findings as it deems necessary and appropriate, and shall issue its final report and recommendations on or before June 30, 2008.

All reports shall be submitted to the Governor, the Temporary President of the Senate, the Speaker of the Assembly, the Minority Leader of the Senate and the Minority Leader of the Assembly.

7. No member of the Commission shall be disqualified from holding any public office or employment, nor shall he or she forfeit any such office or employment by virtue of his or her appointment hereunder.

Members of the Commission shall receive no compensation for their services but shall be allowed their actual and necessary expenses incurred in the performance of their functions hereunder.

All members of the Commission shall serve at the pleasure of the Governor and vacancies shall be filled in the same manner as original appointments.

8. Every agency, department, office, division or public authority of this state shall cooperate with the Commission and furnish such information and assistance as the Commission determines is reasonably necessary to accomplish its purposes.

G I V E N under my hand and the Privy Seal of the State in the City of Albany this twenty-ninth day of May in the year two thousand seven.

BY THE GOVERNOR

Secretary to the Governor

http://www.ny.gov/governor/executive_order...eorders/15.html

[Livyjr]

THE NEW YORK DAILY NEWS DAILY POLITICS BLOG:

ELIOT SPITZER ON GOVERNMENT REFORM TO THE ROCKEFELLER INSTITUTE OF GOVERNMENT, November 21, 2005:

I'm proud of the fact that my office has achieved a great deal during the last seven years in reforming Wall Street and the financial sector.

THAT WAS POSSIBLE IN PART BECAUSE I KNEW WHOSE SIDE I WAS ON.

I DIDN'T WAIVER.

I didn't worry about the pushback that inevitably comes when you try to change the status quo.

I believe that what happened on Wall Street and in these various other areas can also happen on State Street here in Albany.

My starting point is this proposition: you can't achieve reform - you can't achieve meaningful, far-reaching reform - unless it is based on core values.

In the financial sector we argued core values that no one could dispute: honest, full, free and fair competition.

OUR GOAL WAS AND IS TO MAKE THE FRE ENTERPRISE SYSTEM WORK AS IT SHOULD - THROUGH TRUTHFUL, FULL DISCLOSURE AND THE CREATION OF A LEVEL PLAYING FIELD.

To be sure, there were those who asserted that our actions would harm the markets.

The people who did that were protectors of the status quo.

THEY DID NOT UNDERSTAND THAT THERE ARE MOMENTS WHEN GOVERNMENT MUST ACT TO HELP RESTORE THE INTEGRITY OF THE MARKETS.

They did not understand that enforcement of the rules is good for business, and that such action helps unleash the true power of the system - with capital flowing freely to the greatest opportunities for growth.

On Wall Street and throughout the financial sector, the status quo was a system based too frequently on cronyism.

It was a system in which a favored few special interests took advantage, BY FRAUD, of the rest of us.

It was a system where one senior participant, without any sense of irony, observed that what often was a conflict of interest was now a synergy.

The reality, though, was that they were robbing people of pensions and nest eggs.

And their actions distorted and harmed the markets.

We stepped forward and stopped the fraud we found, returned money to people, and restored competition.

THIS WAS GOOD FOR THE MARKETS AND GOOD FOR THE ECONOMY OVERALL.

IN FACT, CONTRARY TO THE PREDICTIONS OF THE NAYSAYERS, THE INDUSTRIES WE INVESTIGATED AND THEN REFORMED ARE STRONGER NOW THAN THEY WERE BEFORE.

That even goes for the individual companies that we investigated.

They may not have liked the process, but they were made stronger as a result.

IN THE END, WE ACHIEVED RESULTS WHERE OTHERS HAD FAILED AND GIVEN UP, AND WHERE NO ONE THOUGHT IT WAS POSSIBLE.

WE HAVE DONE IT TIME AND TIME AGAIN - INVESTMENT BANKS, MUTUAL FUNDS, PHARMACEUTICAL COMPANIES, INSURANCE COMPANIES AND ELSEWHERE.

Posted by John Galt on December 22, 2007 5:46 PM

http://www.nydailynews.com/blogs/dailypoli...4.html#comments

NEWSWEEK

News December 19, 2007, 11:15PM EST

"The Bear Flu: How It Spread - A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster"

by David Henry and Matthew Goldstein

When the subprime mortgage market began to unravel late in 2006, global bond markets barely flinched.

But when two Bear Stearns (BSC) hedge funds collapsed in June, the event sparked a global credit crisis that has yet to ease.

New evidence sheds light on how those hedge funds—and their managers—became star players in the subprime bust, the biggest financial disaster in decades.

The revelations also show how other players in the mortgage market adopted the Bear funds' tactics, collectively building a financing structure with many of the hallmarks of a pyramid scheme.

The legal consequences are still unfolding.

The End of an Era?

Amid the market turmoil earlier this spring, Cioffi hoped the Klios would work their magic once again.

In April, as losses at the funds began mounting, Cioffi set up another CDO, High Grade Structured Credit CDO 2007-1, which issued short-term paper and offered investors a money-back guarantee from Bank of America.

Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year, according to Thomson Financial (TOC).

Just as before, Cioffi used the money to buy assets from the hedge funds, perhaps to prop up the portfolios, which by then were on the brink of collapse.

In an April conference call with the hedge funds' investors, Cioffi said the new CDO was part of his plan "to get the funds back on track to generate positive returns."

It didn't work.

Just weeks after the deal for the CDO closed, the Bear funds imploded, wiping out $1.6 billion of investors' money.

By autumn the practice of using CDOs to raise cash was dead.

Money-market funds had stopped buying the short-term debt, and the credit markets were frozen.

That forced Citigroup and Bank of America to make good on their guarantees to investors in Cioffi's CDOs, triggering big losses at the two banks.

The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession.

As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.

FOR IMMEDIATE RELEASE:

January 18, 2008

"GOVERNOR SPITZER LEADS FIRST MEETING OF COMMISSION TO MODERNIZE REGULATION OF FINANCIAL SERVICES - Commission Discusses Regulatory Reform to Help Maintain New York’s Status as World Financial Capital and Ensure the Highest Standards of Consumer Protection for New Yorkers"

Governor Eliot Spitzer today hosted the first formal meeting of the Commission to Modernize the Regulation of Financial Services, which includes heads of major financial services organizations, consumer advocates, the business community, legislators and regulators.

The commission discussed an innovative proposal to institute principles-guided regulation in New York along with other potential reforms.

New York’s financial services market has been burdened by current regulations – a litany of detailed rules that are ineffective at achieving consumer protection.

The United Kingdom and other international markets are moving to principle-based regulation, which focuses on broad guidelines.

Some companies and consumers are concerned this may mean diminished compliance with specific rules, but the new principles-guided approach preserves relevant rules, while asking regulators and companies to focus on achieving desired outcomes.

The result will be healthy markets and strong consumer protection without unneeded burdens.

The financial services industry is a bedrock of New York’s economy.

The commission will make recommendations for new laws and regulations that promote competition and business growth, while effectively protecting consumers and honest businesses from unfair or unethical practices.

By reforming burdensome and ineffective regulation, the commission's recommendations will help New York retain and enhance its status as the world's financial capital.

“Modernizing regulation of financial services is first and foremost about keeping New York the financial capital of the world,” said Governor Spitzer.

“The fact of the matter is that New York’s current regulations are out of date."

"We must have regulations that promote our essential goals: a healthy, creative competitive market for financial services, access for consumers and businesses to the services they need, and strong, effective consumer protection."

"Furthermore, my experience has demonstrated to me that proper regulations will have a positive impact on the financial market."

"We have brought together many of the best minds in the State to accomplish this task.”

After the meeting, Governor Spitzer was joined by Herbert M. Allison, Chairman, President and Chief Executive Officer, TIAA-CREF, Laurence D. Fink, Chairman and Chief Executive Officer, BlackRock, John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley and Martin J. Sullivan, President and Chief Executive Officer, AIG at a press conference to discuss the work of the commission and how principles-guided regulation will lead to a focus on outcomes rather than process.

The commission will consider:

Developing “principles-guided” regulation as a unique alternative to the principles-based approach being instituted in the United Kingdom.

The new method provides the benefits of a principles-based approach, while preserving the positive elements of current regulation.

Under the principles-guided approach, the principles act as guidance for interpreting existing regulations and statutes, and as key objectives for developing any future regulation.

The principles guide the regulator to focus on outcomes, rather than the rules in and of themselves.

Having a single state regulator for all financial services.

Similar products should not be treated differently if they are sold by different types of companies.

Instituting a risk-based approach to regulation.

Examinations of financial services companies should focus on what is important and what really makes a difference.

Eliminating out-of-date rules that are unnecessarily burdensome.

Senator Hugh T. Farley, Chair of the Banking Committee said:

“New York remains the center of the global financial universe."

"In order to maintain our leadership, we must balance the need to encourage innovation and competition with our responsibility to ensure safety, soundness, and consumer protections."

"This commission provides the opportunity for our finest thinkers to help guide financial regulation in the new millennium.”

Senator James L. Seward, Chair of Insurance Committee said:

“The financial services industry is a key component of the economy of New York State and the nation."

"I believe that it is important that we continue to review ways to ensure the most effective and efficient regulation of the financial services industry in New York State."

"I am hopeful that the deliberations of the commission will help to ensure that New York State continues to be a leader in the regulation of insurance and financial services.”

Assemblyman Joseph D. Morelle, Chair of the Insurance Committee said:

“Principles-based regulatory reform will establish the foundation for a more market-responsive and prosperous financial sector while at the same time providing the ethical guidelines and consumer protection the public requires."

"Our current rules-based approach places us at a disadvantage in terms of more progressive overseas markets."

"In order to maintain New York's primacy in the financial world, a prudent change of approach is needed now.”

Assemblyman Darryl Towns, Chair of the Committee on Banks said:

“I look forward to serving on the commission and working together with the financial services community to improve the regulatory framework governing this vital industry so that New York can retain its status as the world financial capital, and ultimately, so that we can provide our consumers with quality, innovative financial services.”

Insurance Superintendent Eric Dinallo, the Chair of the Commission to Modernize the Regulation of Financial Services, said:

“The benefit of state regulation is that states can be the laboratory for developing best practices."

"We want to offer New York as a national model of how to regulate financial services.”

Richard. H. Neiman, Superintendent of Banks for New York State, said:

“We see this as the perfect time to reevaluate our regulatory models, to ensure they are calibrated to respond to the emerging challenges of an increasingly global marketplace."

"The Banking Department is well underway with a top-to-bottom review of the banking law, to identify further opportunities to reform.”

Commission Executive Director Scott Rothstein said:

“We are proposing that the commission consider recommending a unique approach to regulation in New York--a principles-guided regime."

"This is a way to focus on outcomes within the existing regulatory framework."

"The principles serve to help the interpretation of rules and guide creation of new rules."

"We can thus move to greater focus on outcomes, without sacrificing certainty for the industry or consumer protection.”

Martin J. Sullivan, President and CEO of American International Group, Inc., said:

“We are grateful for the opportunity to participate in this important and promising initiative."

"We look forward to helping ensure that the commission achieves its goal of streamlining the regulation of New York’s financial services sector in a way that enhances the industry’s ability to compete globally and better serve its customers.”

Herbert Allison, Chief Executive Officer of TIAA-CREF said:

“I commend Governor Spitzer for creating this commission to comprehensively review New York State’s approach to regulating its financial industry, and look forward to constructive discussions among commission members in the months to come.”

"If conceived and implemented properly, steps to modernize regulations could better protect the public’s interest and enhance New York’s position in the increasingly competitive global market for financial services.”

Hector Sants, the Chief Executive Officer of the Financial Services Authority of the United Kingdom, spoke to the commission about how his agency, the sole regulator for all financial services in the U.K., is transitioning from rules-based to principles-based regulation.

Since the commission was announced, its staff has been meeting with members one-on-one to discuss their views on the key issues.

This extensive review ensured that the first formal meeting was a more productive gathering.

The work of the commission will now be conducted through working groups by industry: insurance, banking and securities, and by topics such as principles-guided regulation, a single state regulator, registration and licensing, and how to manage the difference between regulation required for transactions with individual investors as opposed to among large institutions.

The meeting was held at New York University’s Helen and Martin Kimmel Center for University Life in the Rosenthal Pavilion.

http://www.ny.gov/governor/press/0118081.html

[Livyjr]

FOR IMMEDIATE RELEASE:

January 18, 2008

"GOVERNOR SPITZER LEADS FIRST MEETING OF COMMISSION TO MODERNIZE REGULATION OF FINANCIAL SERVICES - Commission Discusses Regulatory Reform to Help Maintain New York’s Status as World Financial Capital and Ensure the Highest Standards of Consumer Protection for New Yorkers"

Governor Eliot Spitzer today hosted the first formal meeting of the Commission to Modernize the Regulation of Financial Services, which includes heads of major financial services organizations, consumer advocates, the business community, legislators and regulators.

The commission discussed an innovative proposal to institute principles-guided regulation in New York along with other potential reforms.

New York’s financial services market has been burdened by current regulations – a litany of detailed rules that are ineffective at achieving consumer protection.

The United Kingdom and other international markets are moving to principle-based regulation, which focuses on broad guidelines.

Some companies and consumers are concerned this may mean diminished compliance with specific rules, but the new principles-guided approach preserves relevant rules, while asking regulators and companies to focus on achieving desired outcomes.

The result will be healthy markets and strong consumer protection without unneeded burdens.

By reforming burdensome and ineffective regulation, the commission's recommendations will help New York retain and enhance its status as the world's financial capital.

“Modernizing regulation of financial services is first and foremost about keeping New York the financial capital of the world,” said Governor Spitzer.

“The fact of the matter is that New York’s current regulations are out of date."

"We must have regulations that promote our essential goals: a healthy, creative competitive market for financial services, access for consumers and businesses to the services they need, and strong, effective consumer protection."

"Furthermore, my experience has demonstrated to me that proper regulations will have a positive impact on the financial market."

"We have brought together many of the best minds in the State to accomplish this task.”

The commission will consider:

The principles guide the regulator to focus on outcomes, rather than the rules in and of themselves.

Instituting a risk-based approach to regulation.

Examinations of financial services companies should focus on what is important and what really makes a difference.

http://www.ny.gov/governor/press/0118081.html

FROM THE DEPARTMENT OF HAVEN'T WE BEEN HERE BEFORE?

Testimony of Chairman Alan Greenspan - Private-sector refinancing of the large hedge fund, Long-Term Capital Management Before the Committee on Banking and Financial Services, U.S. House of Representatives"

October 1, 1998

Mr. Chairman and other members of the Committee, I thank you for this opportunity to report on the Federal Reserve's role in facilitating the private-sector refinancing of the large hedge fund, Long-Term Capital Management (LTCM).

In my remarks this morning, I will attempt to put into some perspective the events of the past few weeks and discuss some questions of importance to public policy makers that they raise.

The Federal Reserve Bank of New York's efforts were designed solely to enhance the probability of an orderly private-sector adjustment, not to dictate the path that adjustment would take.

As President McDonough just related, no Federal Reserve funds were put at risk, no promises were made by the Federal Reserve, and no individual firms were pressured to participate.

Officials of the Federal Reserve Bank of New York facilitated discussions in which the private parties arrived at an agreement that both served their mutual self interest and avoided possible serious market dislocations.

Financial market participants were already unsettled by recent global events.

Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants, including some not directly involved with the firm, and could have potentially impaired the economies of many nations, including our own.

With credit spreads already elevated and the market prices of risky assets under considerable downward pressure, Federal Reserve officials moved more quickly to provide their good offices to help resolve the affairs of LTCM than would have been the case in more normal times.

In effect, the threshold of action was lowered by the knowledge that markets had recently become fragile.

Moreover, our sense was that the consequences of a fire sale triggered by cross-default clauses, should LTCM fail on some of its obligations, risked a severe drying up of market liquidity.

The plight of LTCM might scarcely have caused a ripple in financial markets or among federal regulators 18 months ago--but in current circumstances it was judged to warrant attention.

What is remarkable is not this episode, but the relative absence of such examples over the past five years.

Dynamic markets periodically engender large defaults.

Events of the Past Few Weeks

LTCM is a hedge fund, or a mutual fund that is structured to avoid regulation by limiting its clientele to a small number of highly sophisticated, very wealthy individuals and that seeks high rates of return by investing and trading in a variety of financial instruments.

Since its founding in 1994, LTCM has had a prominent position in the community of hedge funds, in part because of its assemblage of talent in pricing and trading financial instruments, as well as its large initial capital stake.

In its first few years of business, it earned an enviable reputation by racking up a string of above-normal returns for its investors.

LTCM appears principally to have garnered those returns by making judgments on interest rate spreads and the volatilities of market prices.

In its search for high return, LTCM levered its capital through securities repurchase contracts and derivatives transactions, relying on sophisticated mathematical models of behavior to guide those transactions.

As long as the configuration of returns generally mimicked their historical patterns, LTCM's mathematical models of asset pricing could be used to ferret out temporary market price anomalies.

Their trading both closed such price gaps and earned an extra bit of return on capital for them.

But it is the nature of the competitive process driving financial innovation that such techniques would be emulated, making it ever more difficult to find market anomalies that provided shareholders with a high return.

Indeed, the very efficiencies that LTCM and its competitors brought to the overall financial system gradually reduced the opportunities for above-normal profits.

Indeed, LTCM acknowledged this when returning $2-3/4 billion of capital to investors at the end of 1997.

To counter these diminishing opportunities, LTCM apparently reached further for return over time by employing more leverage and increasing its exposure to risk, a strategy that was destined to fail.

Unfortunately for its shareholders, LTCM chose this exposure just as financial market uncertainty and investor risk aversion began to rise rapidly around the world.

In that environment--so at variance with the experience built into its models--LTCM's embrace of risk on a large scale produced stunning losses.

As we now know, by the end of August the firm had lost half its capital base.

And as September unfolded, the bleeding continued.

The firm, however, apparently did not unwind its positions significantly.

In our dynamic market economy, investors and traders, at times, make misjudgments.

When market prices and interest rates adjust promptly to evidence of such mistakes, their consequences are generally felt mostly by the perpetrators and, thus, rarely cumulate to pose significant problems for the financial system as a whole.

Indeed, the operation of an effective market economy necessitates that investment funds committed to capital projects that do not accurately reflect consumer and business preferences should incur losses and ultimately be liquidated.

What value is left needs to be redirected to profitable uses--those that more accurately reflect market preferences.

By such winnowing of inefficiencies, productivity is enhanced and standards of livings expand over time.

Financial markets operate efficiently only when participants can commit to transactions with reasonable confidence that the risk of nonpayment can be rationally judged and compensated for.

Effective and seasoned markets pass this test almost all of the time.

On rare occasions, they do not.

Fear, whether irrational or otherwise, grips participants and they unthinkingly disengage from risky assets in favor of those providing safety and liquidity.

The subtle distinctions that investors make, so critical to the effective operation of financial markets, are abandoned.

Assets, good and bad, are dumped indiscriminately in circumstances of high uncertainty and fear that are not conducive to planning and investment.

Such circumstances, were they generalized and persistent, would be wholly inconsistent with the functioning of sophisticated economies supported by long-term capital investment.

Quickly unwinding a complicated portfolio that contains exposure to all manner of risks, such as that of LTCM, in such market conditions amounts to conducting a fire sale.

The prices received in a time of stress do not reflect longer-run potential, adding to the losses incurred.

Of course, a fire sale that transfers wealth from one set of sophisticated market players to another, without any impact on the financial system overall, should not be a concern for the central bank.

Moreover, creditors should reasonably be expected to put some weight on the possibility of a large market swing when making their risk assessments.

Indeed, when we examine banks we expect them to have systems in place that take account of outsized market moves.

However, a fire sale may be sufficiently intense and widespread that it seriously distorts markets and elevates uncertainty enough to impair the overall functioning of the economy.

Sophisticated economic systems cannot thrive in such an atmosphere. 1

The scale and scope of LTCM's operations, which encompassed many markets, maturities, and currencies and often relied on instruments that were thinly traded and had prices that were not continuously quoted, made it exceptionally difficult to predict the broader ramifications of attempting to close out its positions precipitately.

That its mistakes should be unwound and losses incurred was never open to question.

How they should be unwound and when those losses incurred so as to foster the continued smooth operation of financial markets was much more difficult to assess.

The price gyrations that would have evolved from a fire sale would have reflected fear-driven judgments that could only impair effective market functioning and generate losses for innocent bystanders.

While the principle that fire sales undermine the effective functioning of markets may be clear, deciding when a potential market disruption rises to a level of seriousness warranting central bank involvement is among the most difficult judgments that ever confronts a central banker.

In situations like this, there is no reason for central bank involvement unless there is a substantial probability that a fire sale would result in severe, widespread, and prolonged disruptions to financial market activity.

It was the judgment of officials at the Federal Reserve Bank of New York, who were monitoring the situation on an ongoing basis, that the act of unwinding LTCM's portfolio in a forced liqudiation would not only have a significant distorting impact on market prices but also in the process could produce large losses, or worse, for a number of creditors and counterparties, and for other market participants who were not directly involved with LTCM.

In that environment, it was the FRBNY's judgment that it was to the advantage of all parties--including the creditors and other market participants--to engender if at all possible an orderly resolution rather than let the firm go into disorderly fire-sale liquidation following a set of cascading cross defaults.

As President McDonough has detailed, officers of the Federal Reserve Bank of New York contacted a number of creditors and asked if there were alternatives to forcing the firm into bankruptcy.

At the same time, FRBNY officers informed some of their colleagues at the Federal Reserve Board, the Treasury, and other financial regulators of their ongoing activities.

The troubles of LTCM were not a complete surprise to its counterparties.

After all, LTCM's earlier statements regarding its August losses were well known, and sophisticated counterparties understood the difficulties in closing out large losing positions.

In addition, the commercial banks among its creditors had already begun taking normal precautionary measures associated with exposure to counterparties whose condition is deteriorating.

Still, creditors as a whole most likely underestimated the size and scope of the market bets that LTCM was undertaking, an issue that is currently under review.

On September 23, the private sector parties arrived at an agreement providing a capital infusion of about $3-1/2 billion in return for substantially diluting existing shareholders' stake in LTCM.

Control of the firm passed from the current management to a committee determined from the outside by the new investors.

Those investors intend to shrink LTCM's portfolio so as to reduce risk of loss and return the remaining capital to the investors as soon as practicable.

I do not rule out the possibility that the new owners of what is left of LTCM may decide to keep part of it in business.

That is their judgment to make.

This agreement was not a government bailout, in that Federal Reserve funds were neither provided nor ever even suggested.

Agreements were not forced upon unwilling market participants.

Creditors and counterparties calculated that LTCM and, accordingly, their claims, would be worth more over time if the liquidation of LTCM's portfolio was orderly as opposed to being subject to a fire sale.

And with markets currently volatile and investors skittish, putting a special premium on the timely resolution of LTCM's problems seemed entirely appropriate as a matter of public policy.

Of course, any time that there is public involvement that softens the blow of private-sector losses--even as obliquely as in this episode--the issue of moral hazard arises.

Any action by the government that prevents some of the negative consequences to the private sector of the mistakes it makes raises the threshold of risks market participants will presumably subsequently choose to take.

Over time, economic efficiency will be impaired as some uneconomic investments are undertaken under the implicit assumption that possible losses may be borne by the government.

But is much moral hazard created by aborting fire sales?

To be sure, investors wiped out in a fire sale will clearly be less risk prone than if their mistakes were unwound in a more orderly fashion.

But is the broader market well served if the resulting fear and other irrational judgments govern the degree of risk participants are subsequently willing to incur?

Risk taking is a necessary condition for wealth creation.

The optimum degree of risk aversion should be governed by rational judgments about the market place, not the fear flowing from fire sales.

The Federal Reserve provided its good offices to LTCM's creditors, not to protect LTCM's investors, creditors, or managers from loss, but to avoid the distortions to market processes caused by a fire-sale liquidation and the consequent spreading of those distortions through contagion.

To be sure, this may well work to reduce the ultimate losses to the original owners of LTCM, but that was a byproduct, perhaps unfortunate, of the process.

I should add that, in order to keep incentives working in their favor, the creditors of LTCM apparently also understood the importance of some cushioning of the losses to the owners and managers of the firm.

The private creditors and counterparties in the rescue package chose to preserve a sliver of equity for the original owners--one tenth--so that some of the management would have an incentive to stay with the firm to assist in the liquidation of the portfolio.

Regrettably, the creditors felt that, given the complexity of market bets woven into a bewildering arrray of financial contracts, working with the existing management would be far easier than starting from scratch.

Some Questions for Policy Makers

Without doubt, extensive study will be required to put the events of the past few weeks into proper perspective.

As a member of the President's Working Group on Financial Markets, I support Secretary Rubin's call for a special study on the public policy implications of hedge funds.

While the affairs of LTCM are by no means settled, I would like to pose some tentative questions that may have to be addressed.

First, how much dependence should be placed on financial modeling, which, for all its sophistication, can get too far ahead of human judgment?

This decade is strewn with examples of bright people who thought they had built a better mousetrap that could consistently extract an abnormal return from financial markets.

Some succeed for a time.

But while there may occasionally be misconfigurations among market prices that allow abnormal returns, they do not persist.

Indeed, efforts to take advantage of such misalignments force prices into better alignment and are soon emulated by competitors, further narrowing, or eliminating, any gaps.

No matter how skillful the trading scheme, over the long haul, abnormal returns are sustained only through abnormal exposure to risk.

Second, what steps could counterparties have taken to ensure that they had properly estimated their exposure, particularly in markets that are volatile?

To an important degree, the creditors of LTCM were induced to infuse capital into the firm because they failed to stress test their counterparty exposures adequately and therefore underestimated the size of the uncollateralized exposure that they could face in volatile and illiquid markets.

In part, this also reflected an underappreciation of the volume and nature of the risks LTCM had undertaken and its relative size in the overall market.

By failing to make those determinations, its fellow market participants failed to put an adequate brake on LTCM's use of leverage.

To be sure, sometimes decisions are based on judgments about the soundness of borrowers that are accepted from third parties or, possibly in this case, that are founded on the impressive qualifications of LTCM's principals.

In some cases, such truncated risk appraisals may be accurate, but they are not a substitute for a rigorous analysis by the lender of the borrower's overall credit worthiness and risk profile.

Third, in this regard what lessons are there for bank regulators?

Domestic commercial bank exposure to LTCM included both direct lending and acting as counterparties to the firm in derivatives contracts.

A preliminary review of bank dealings with LTCM suggests that the banks have collateral adequate to cover most of their current mark-to-market exposures with LTCM.

The unexpected surge in risk aversion and the dramatic opening up of interest rate spreads in August obviously caught LTCM wrong footed.

Counterparties, including banks, continued to collect collateral for marks to market.

What they were not collateralized against was the losses that might have occurred when prices moved even further and market liquidity dried up in a fire sale.

Supervisors of banks and security firms must assess whether current procedures regarding stress testing and counterparty assessment could have been improved to enable counterparties to take steps to insulate themselves better from LTCM's debacle.

More important will be the assessment of whether those procedures are adequate for the future.

But this is an area in which much work has been ongoing.

During the fourth quarter of 1997 and the first quarter of 1998, supervision staff of the Federal Reserve Bank of New York and the Board met with managers at several major New York banking institutions to discuss their current relationships with hedge funds, updating a similar study conducted 3-1/2 years earlier.

Fourth, does the fact that investors have lost most of their capital and creditors may take some losses on their exposure to LTCM call for direct regulation of hedge funds?

It is questionable whether hedge funds can be effectively directly regulated in the United States alone.

While their financial clout may be large, hedge funds' physical presence is small.

Given the amazing communication capabilities available virtually around the globe, trades can be initiated from almost any location.

Indeed, most hedge funds are only a short step from cyberspace.

Any direct U.S. regulations restricting their flexibility will doubtless induce the more aggressive funds to emigrate from under our jurisdiction.

The best we can do in my judgment is what we do today: Regulate them indirectly through the regulation of the sources of their funds.

We are thus able to monitor far better hedge funds' activity, especially as they influence U.S financial markets.

If the funds move abroad, our oversight will diminish.

In the first line of risk defense, if I may put it that way, are hedge funds' lenders and counterparties.

Commercial and investment banks especially have the analytic skills to judge the degree of risk to which the funds are exposed.

Their self interest has, with few exceptions but including the one we are discussing today, controlled the risk posed by hedge funds.

Banking supervisors are the second line of risk defense in their examination of lending procedures for safety and soundness.

We neither try, nor should we endeavor, to micro-manage bank lending activity.

We have nonetheless built up significant capabilities in evaluating the complex lending practices in OTC derivatives markets and hedge funds.

If, somehow, hedge funds were barred worldwide, the American financial system would lose the benefits conveyed by their efforts, including arbitraging price differentials away.

The resulting loss in efficiency and contribution to financial value added and the nation's standard of living would be a high price to pay--to my mind, too high a price.

Fifth, how much weight should concerns about moral hazard be given when designing mechanisms for governmental regulation of markets?

By way of example, we should note that were banks required by the market, or their regulator, to hold 40 percent capital against assets as they did after the Civil War, there would, of course, be far less moral hazard and far fewer instances of fire-sale market disruptions.

At the same time, far fewer banks would be profitable, the degree of financial intermediation less, capital would be more costly, and the level of output and standards of living decidely lower.

Our current economy, with its wide financial safety net, fiat money, and highly leveraged financial institutions, has been a conscious choice of the American people since the 1930s.

We do not have the choice of accepting the benefits of the current system without its costs.

Conclusion

For so long as there have been financial markets, participants have had on occasion to weigh the costs and, especially, the externalities associated with fire-sale liquidations of troubled entities against short-term assistance to tide the firms over for a time.

It was such a balancing of near-term costs and longer-term benefits that presumably led J.P. Morgan to convene the leading bankers of his age--both commercial and investment--in his library in 1907 to address the severe panic of that year.

Such episodes were recognized as among those rare occasions when otherwise highly effective markets seize up and temporary ad hoc responses were required.

The convening of LTCM investors and lenders last week at the Federal Reserve Bank of New York could be viewed in that long tradition.

It should similarly be viewed as a rare occasion, warranted because of the potential for serious disruptions to markets.

We must also remain mindful where to draw the line at which public-sector involvement ends.

The efforts last week were limited to facilitating a private-sector agreement and had no implications for Federal Reserve resources or policies.

Footnotes

1 At the same time, not all fire sales are without merit.

The Resolution Trust Corporation earlier this decade chose to offer commercial real estate in what might be termed a fire sale because it was the only way an otherwise seized-up market could be galvanized.

Some level of market prices had to be established--even if below "intrinsic" or longer-run value in order to re-establish a two-way market.

This was a special case.

http://www.federalreserve.gov/boarddocs/te...ny/19981001.htm

[Livyjr]

FOR IMMEDIATE RELEASE:

January 18, 2008

"GOVERNOR SPITZER LEADS FIRST MEETING OF COMMISSION TO MODERNIZE REGULATION OF FINANCIAL SERVICES - Commission Discusses Regulatory Reform to Help Maintain New York’s Status as World Financial Capital and Ensure the Highest Standards of Consumer Protection for New Yorkers"

Governor Eliot Spitzer today hosted the first formal meeting of the Commission to Modernize the Regulation of Financial Services, which includes heads of major financial services organizations, consumer advocates, the business community, legislators and regulators.

The commission discussed an innovative proposal to institute principles-guided regulation in New York along with other potential reforms.

New York’s financial services market has been burdened by current regulations – a litany of detailed rules that are ineffective at achieving consumer protection.

The United Kingdom and other international markets are moving to principle-based regulation, which focuses on broad guidelines.

Hector Sants, the Chief Executive Officer of the Financial Services Authority of the United Kingdom, spoke to the commission about how his agency, the sole regulator for all financial services in the U.K., is transitioning from rules-based to principles-based regulation.

http://www.ny.gov/governor/press/0118081.html

"Northern Rock - Politics of a crisis"

Wednesday September 19, 2007

The Guardian

There were easily more TV crews out looking for queues at Northern Rock yesterday than actual queues.

As they opened for trade, only four branches had lines outside - and they were small.

The number of phone calls to the bank was a tenth of what it had been on Monday.

Even the website seemed to be working.

So the panic appears to be over.

Alistair Darling's last-resort guarantee of all deposits with the Rock has calmed customers down.

But what toll has a dramatic U-turn in policy, made after a long weekend of confusion, taken on the chancellor and his government?

There can be no doubt that this episode has caused some political damage.

What began as private-sector plight - one bank's shortage of funds - ballooned into an embarrassment for the government because it failed to respond decisively with sufficient speed.

Indeed it was often painfully apparent just how new Mr Darling is to his job.

Even yesterday afternoon, a day after the chancellor's announcement, there was confusion over the extent of his guarantee, or even whether it would be enshrined in law.

Some officials admitted they just did not know.

This really has been government on the hoof: not only is the ink not dry on this policy - whole chunks of it are yet to be written.

Despite appearances, ministers and officials' actions have been reasonably consistent.

Mervyn King, the head of the Bank of England, made it clear there would be no support for financiers who had behaved foolishly - but he would look out for signs of damage to the wider economy.

Northern Rock was a panic that threatened to become an all-out crisis, and so officials intervened.

Yet such subtle argument is lost on most lay people, who merely see backpedalling.

That disconnect between technocrats and the public has been a feature of this turmoil.

There were the fine distinctions between "solvency" and "liquidity"; and references to those lining up outside branches of Northern Rock as "irrational".

Hector Sants, the chief executive of the Financial Services Authority, declared yesterday:

"The system has worked."

Such a claim could only have been made from a tower in Canary Wharf; for everyone else from Newcastle to north London's Golders Green, the UK resembled Buenos Aires in the middle of a bank run - with more orderly queues.

A financial crisis, a government in disarray - and an open goal for the opposition.

But it is one the other parties have not yet hit, at least according to today's Guardian/ICM poll.

Conducted largely over the past weekend, when the Northern Rock story was gathering momentum, it shows Labour ahead of the Conservatives by eight points - the biggest lead since David Cameron took his party's helm.

This poll could be an aberration, or reflect voters' desire for stability during a crisis: Hilaire Belloc's principle of "always keep a-hold of Nurse / for fear of finding something worse".

Alternatively, it could reflect the reality that on matters of financial regulation there is little between the two main parties.

The last Conservative proposal in the area came from John Redwood, whose big idea was to scrap all red tape on mortgages - this amid a crisis caused by lax lending.

Like Labour, the main opposition party thinks that the City must be left to its own devices.

In 1992 there was a similar cross-party consensus on the ERM - that is, until Black Wednesday.

Whether the lesser crisis at Northern Rock will shake up economic thinking in the same way remains to be seen.

But a debate on banking regulation - especially transparency - is overdue.

The Liberal Democrats are best placed to lead it.

Over many years their Treasury spokesman, Vince Cable, has warned about the dangers of financiers using complex financial instruments that few fully understand.

The other parties must give some thought to his proposal that, especially when the good times roll, regulators need to enforce traditional discipline.

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