Across the board, the Bush Administration aggressively deregulated financial markets. At the OTS this strategy was spearheaded by James Gilleran who headed the agency from 2001-2005. In his first 3 years, he cut OTS’s 1,200 staff by a quarter even as the value of the assets the agency oversaw increased by half. Banks were also allowed to draw down their reserves on average by a third to the lowest level in 20 years. To justify this, the OTS accepted unrealistic projections on what expected losses in the banks’ loan portfolios would be. At the time thrifts were making more and more higher risk adjustable rate mortgages (ARMs), the OTS permitted them to assess the risk of these in terms of their introductory low rate and not the higher rate to which the loans would ultimately convert. And no, these loans were not being to the poor. As part of Gilleran’s deregulation, government obligations to lend in low income communities were not strictly enforced.

The structure of the OTS was also at odds with its mission. It had an inherent and fatal conflict of interest. It was funded by the very banks it was tasked with regulating. The bigger the bank the bigger the contribution. So although the OTS oversaw some 750 banks, Washington Mutual (WaMu) alone paid 13% of its budget. The mortgage writer Countrywide which was actually recruited by the OTS to become a thrift on the promise that it would be loosely regulated accounted for another 5% of the OTS budget.

In short, the thrifts were paying the OTS not to regulate them, and in exchange for the budget it received from them the OTS turned a blind eye to their reckless behavior. This arrangement worked out very well until the thrifts crashed and burned. Who could have predicted . . .?

Tied in with this is the scandalous way the government is compensated for these leases (see also item 172). Since 1982, the government has allowed the oil industry to make royalty payments through the Mineral Management Service (MMS) under its Royalty in Kind (RIK) program. Rather than paying cash, oil companies pay royalties in the form of crude oil and natural gas which the RIK then sells. This is not a small enterprise. The RIK handles around 150,000/bbls of crude oil and 800 million cubic feet of natural gas a day and does about $4 billion in business a year. It is also totally corrupt.

On September 10, 2008, the Department of Interior Inspector General released 3 reports online which detailed activities within the RIK program. These were based on investigations that took nearly two years and cost $5.3 million. One describes how three senior officials who had been with the RIK since its creation under Reagan colluded together to award two of them post-retirement six figure consulting salaries. Lucy Denett was associate director of the Minerals Revenue Management which was a subsection of the MMS which oversaw the RIK. She retired during the investigation on January 31, 2008. Jimmy Mayberry was a special assistant to Denett from 2000 to his retirement on January 3, 2003. On his retirement, he formed a consulting company Federal Business Solutions (FBS). Milton Dial was the assistant program director for the RIK 2001-October 2003 and retired September 2004. Basically, what happened was that Denett asked Mayberry (with Dial’s help) to write up a work proposal which both Denett and Dial knew FBS would bid on after Mayberry’s retirement. Dial then helped steer the contract to FBS, and Denett approved the deal. On his own retirement, Dial went to work for FBS and got his own big salary consulting for the RIK through the FBS contract. In August 2008, Mayberry pled guilty to criminal conflict of interest and was awaiting sentencing. Denett’s case was referred to the Public Integrity Section of the Justice Department but this being the Bush Administration, they declined to prosecute.

The second report concerned Gregory Smith who was deputy program director for the RIK 2001-2004, its director from 2005 until he was detailed out in January 2007. He retired in May 2007 during the course of the Inspector General’s investigation. Smith got approval for paid outside consulting work on technical issues. This was a misrepresentation because what he was really doing was pitching the company for which he was consulting to companies he was doing business with in the RIK. MMS resources and employees were used in furtherance of these aims. Smith also received gifts from these companies in excess of government limits. In addition, he had sex with two of his subordinates, one of whom was his secretary from whom he bought cocaine 4-5 times a year. This was sometimes delivered to him at his office. It came out as well that Smith had lied to OIG investigators previously and that he had instructed other RIK employees to do so. The Inspector General referred his case too to the DOJ’s Public Integrity Section and they declined to prosecute this one as well.

The third report looked at other employees of the MMS. It noted that the MMS was based in Denver but was not overseen by the local director but by an inattentive Denett back in Washington. This led to what the Inspector General called a “culture of ethical failure.” Those who worked at the RIK thought the normal rules did not apply to them. Nearly 1/3 of them socialized with or accepted gifts from oil industry representatives in contravention of government rules and, as the report relates, “When confronted by our investigators, none of the employees involved displayed remorse.” Two RIK marketers liked to party so much with industry reps that they were given the name the “MMS chicks”. They got so drunk at one event that they had to be put up at a company lodge rather than being allowed to drive back to their hotel. One had a sex toy shop as a sideline for which she passed out cards. Both used other drugs and had sexual encounters with oil company personnel. Government employees are supposed to keep their contacts with private industry at arms length but as the report somewhat archly notes, “Sexual relationships with prohibited sources cannot, by definition, be arms-length.” It says a lot about the mindset of those at the RIK that one of the marketers responded to this that she did not consider a one night stand to be a relationship.

Although employees at the RIK often stated that they did not think they had done anything wrong, they did sometimes try to hide or downplay the nature and extent of their socializing with oil industry representatives. At one point in 2006, they even discussed forming a group to write up special ethical rules which would legitimize their activities. The Inspector General left to the Secretary of the Interior what actions and sanctions were to be taken against those still employed in the MMS but indicated that firing would be appropriate for some.

Lack of oversight and the overly business friendly stance of the Bush Administration promoted an atmosphere of corruption, cronyism, and criminality at the RIK/MMS. This was facilitated by industry representatives who should have known what the legal limits were even if their government contacts did not but had no problem involving themselves and their companies in a “pay to play” scheme that was little more than bribery.

On February 4, 2009, Milton Dial received a minimum sentence of probation and a $2,000 fine for violating conflict of interest laws. The judge actually apologized to Dial saying that “high executives” in our government go unpunished although they break this law all the time. Apparently the judge’s argument is that the small time thieves in the Bush Administration deserve our sympathy because they didn’t steal as much as others. This is accountability we can not believe in.

As reported on July 15, 2008, Payne was asked to resign from his DHS advisory position.